PRINCIPLES    OF 


POLITICAL    ECONOMY 


BY 


CHARLES   GIDE 


PROFESSOR  AT  THE  UNIVERSITY  OF  MONTPELLIER,   LECTURER  ON 
ECONOMICS  AT  THE  PARIS   LAW  SCHOOL 


SECOND  AMERICAN  EDITION 

ENTIRELY  KE-TKANSLATED  FROM  THE  LATEST  FRENCH  ORIGINAL 
AND  ADAPTED  TO  THE  USE  OF  AMERICAN  STUDENTS 

BY 

C.   WILLIAM   A.   VEDITZ,   PH.D.,  LL.B. 

SOMETIME  FELLOW    IN   SOCIOLOGY  AT  THE   UNIVERSITY  OF  PENNSYLVANIA 
PROFESSOR  OF  ECONOMICS  AT  BATES  COLLEGE,  LEWISTON,  MAINE 


BOSTON,   U.S.A. 
D.    C.    HEATH   &   CO.,   PUBLISHERS 

1904 


COPYRIGHT,  1891  AND  1903, 
BY  D.  C.  HEATH  &  CO. 


TRANSLATOR'S   PREFACE 

THE  fact  that  Professor  Gide's  "Principes  d'Economie 
Politique  "  has  gone  through  eight  editions  in  the  original 
French  and  been  translated  into  the  Russian,  Swedish,  Polish, 
Dutch,  Finnish,  Spanish,  and  Bohemian  languages,  furnishes 
presumptive  evidence  of  its  usefulness.  The  first  English 
translation,  published  in  1889,  has  been  very  widely  used  in 
England  and  America  as  a  college  text-book,  despite  numer- 
ous features  of  this  translation  which  placed  it  at  a  disad- 
vantage when  compared  with  other  text-books  designed  to 
supply  practically  the  same  need.  These  features  have 
been  pointed  out  from  time  to  time  by  benevolent  critics ; 
but  the  continued  extensive  use  of  the  book  with  classes  in 
political  economy  led  the  publishers  to  conclude  that  a  new 
edition,  without  the  objectionable  features,  and  adapted  more 
closely  to  the  needs  of  American  college  classes  in  economics, 
would  find  an  even  wider  acceptance  than  the  first  English 
translation. 

The  successive  French  editions  of  the  work  have  under- 
gone numerous  and  important  changes,  —  changes  not  so 
much  in  the  general  scope  and  spirit  of  the  book  as  in  the 
manner  of  presenting  certain  sections  of  the  subject.  The 
fundamental  purpose  has  remained  precisely  the  same :  to 
give  the  reader  a  plain  statement  of  the  accepted  principles 
of  economics,  a  summary  of  the  unsettled  problems  of  the 
science,  and  a  clear,  brief,  and  impartial  outline  of  the 
various  solutions  that  have  been  proposed. 


iv  TRANSLATOR'S  PREFACE 

The  book  as  now  issued,  however,  is  not  a  mere  transla- 
tion of  the  eighth  edition  of  the  original,  published  some 
months  ago.  In  some  respects  it  is  more,  and  in  others  less. 

I  have,  in  the  first  place,  eliminated  all  distinctively 
French  illustrative  material  which  could  add  little  or  noth- 
ing to  the  value  of  the  book  in  the  hands  of  American 
readers.  For  this  French  material  I  have  substituted  data 
from  American  sources ;  and  in  so  doing  I  have  endeavored 
to  quote  the  latest  and  most  reliable  authorities.  The  vol- 
ume contains  a  vast  amount  of  statistical  and  other  illus- 
trative material  which,  I  trust,  will  give  the  book  a  vitality, 
a  closeness  to  real  industrial  life,  and  a  smack  of  American 
"  up-to-date-ness  "  which  ought  not  to  be  objectionable,  but 
which  is  unfortunately  so  rare  in  economic  text-books.  I 
see  no  sound  reason  why  political  economy  should  be  re- 
garded—  as  it  undoubtedly  is  regarded  by  a  large  number 
of  students  —  as  a  recondite  study  dealing  with  all  manner 
of  uninteresting  theoretical  minutiae .  No  subject  is,  as  a 
matter  of  fact,  more  intensely  practical.  The  undue  em- 
phasis on  purely  doctrinal  matters,  unaccompanied  by  any 
appeal  to  the  facts  of  economic  experience  or  history,  and 
with  apparently  no  regard  for  the  problems  that  are  now 
demanding  a  solution,  cannot  improve  the  reputation  of 
political  economy.  It  is  to  be  hoped,  therefore,  that  the 
present  accumulation  of  illustrative  material  will  counteract 
this  tendency.  Although  Professor  Gide  himself  gives  an 
abundance  of  statistical  and  historical  data,  I  have  gone 
even  further  in  this  direction.  In  the  discussion  of  protec- 
tive tariffs  I  have  given  a  history  of  our  own  tariff  legis- 
lation ;  in  connection  with  the  discussion  of  metallic  money 
and  of  paper  money  I  have  outlined  our  own  instructive 
monetary  experiments ;  and  in  the  treatment  of  the  prob- 


TRANSLATOR'S  PREFACE  v 

lems  of  bank  organization  I  have  sketched  the  history  of 
banking  in  the  United  States. 

In  the  second  place,  I  have  suppressed  a  few  notes  of 
interest  only  to  the  French  reader,  and  I  have  entirely 
omitted  the  appendix  on  French  finance.  This  appendix 
appears  to  have  been  little  used  in  the  previous  English 
edition,  and  certainly  is  of  no  more  value  to  the  American 
student  than  a  sketch  of  German  or  English  public  finance. 
There  was  really  no  valid  reason  for  its  retention  in  the 
present  edition.  It  would,  to  be  sure,  have  been  possible 
and  perhaps  even  desirable  from  some  points  of  view  to 
substitute  a  sketch  of  American  public  finance.  There  are, 
however,  several  excellent  small  text-books  which  cover  this 
subject  much  more  satisfactorily  than  the  twenty-five  or 
thirty  pages  of  an  appendix. 

In  the  third  place,  some  of  the  sections  on  Distribution 
and  on  Consumption  seemed  hardly  abreast  of  American 
investigations  in  these  exceptionally  important  domains  of 
economic  science,  and  I  have  therefore  taken  the  liberty 
here  and  there  to  add  whole  paragraphs  and  pages.  This 
added  matter,  however,  is  purely  expository  and  supplement- 
ary, and  is  in  no  wise  discordant  with  the  avowed  purpose 
of  Professor  Gide's  book.  For  he  has  assured  me  personally 
and  declared  repeatedly,  that  his  primary  object  is  to  give 
the  student  an  idea  of  all  the  solutions  which  have  been 
proposed  for  mooted  problems ;  and  certainly  the  work  of 
American,  English,  and  Austrian  economists  in  the  field 
of  distribution  is  entitled  to  as  much  consideration  as  the 
exploded  doctrines  of  the  older  schools. 

Except  for  these  changes,  I  have  tried  to  adhere  closely  to 
the  thought  of  the  author.  Wherever  it  has  seemed  neces- 
sary to  choose  between  good  English  style  and  fidelity  in 


vi  TRANSLATOR'S   PREFACE 

rendering  the  thought  or  attitude  of  the  original,  I  have  not 
hesitated  to  sacrifice  the  former  to  the  latter.  Some  of  the 
peculiarities  of  style  are  due  to  this ;  for  the  others  I  must 
bear  the  blame. 

It  would  be  ungrateful  not  to  acknowledge  the  assistance 
rendered  in  the  preparation  of  this  book  by  Dr.  Alvin  S. 
Johnson,  of  Columbia  University,  who  offered  many  sugges- 
tions with  regard  both  to  the  contents  and  the  style,  and  by 
Mr.  William  T.  Foster,  of  Harvard  University,  for  carefully 
reading  the  greater  part  of  the  proof  and  pointing  out  innu- 
merable possibilities  of  improvement  in  English.  I  am  also 
greatly  indebted  to  Professor  Gide  himself  for  the  keen  and 
constant  interest  he  has  shown  in  the  present  translation. 


C.  WILLIAM  A.  VEDITZ. 


BATES  COLLEGE, 
LEWISTON,  MAINE, 
November,  1903. 


FROM   THE  AUTHOR'S   PREFACE   TO   THE 
EIGHTH  EDITION 

THE  first  edition  of  this  book  was  published  twenty  years 
ago.  During  this  period — grande  mortalis  cevi  spatium  — 
the  progress  of  sociological  thought  has  been  so  rapid  that 
opinions  which  were  then  held  to  be  revolutionary  now 
incur  the  danger  of  being  regarded  as  commonplace.  The 
small  school  —  then  in  its  infancy  —  which  I  named  the 
"school  of  solidarity,"  and  which  adopted  a  line  of  thought 
between  "liberalism,"  on  the  one  hand,  and  "collectivism," 
on  the  other,  has  grown  to  eminence;  what  was  then  a 
small,  unfrequented  path  is  now  a  highway  traversed  by 
the  masses. 

What  I  have  endeavored  to  do  is  to  give  a  general  descrip- 
tion, rather  than  an  analysis,  of  the  economic  world  —  of  the 
vast  domain  in  which  we  live  and  move  without  knowing 
very  well  whither  we  are  going.  I  have  sought  to  arouse 
curiosity  and  interest  in  economic  problems  rather  than 
always  to  furnish  cut-and-dried  solutions.  I  have  tried  not 
so  much  to  convey  absolute  conviction  based  on  scientific 
laws  that  are  still  imperfectly  understood,  as  to  impart  a 
sincere  and  fervid  desire  to  discover  the  truth.  I  have, 
moreover,  tried  to  make  political  economy,  which  in  France 
has  long  borne  (without  much  protestation)  the  name  of 
tedious  literature,  appear  to  the  beginner  as  an  attractive 

and  captivating  subject.     I  know  from  personal  testimony 

vii 


viii  FROM  THE  AUTHOR'S  PREFACE 

that  among  the  readers  of  various  nationalities  who  have 
studied  political  economy  in  these  pages,  there  are  at  least 
a  few  who  have  found  the  science  interesting,  who  have 
learned  to  love  it,  and  who  will  continue  to  be  devoted  to  it. 

CHARLES  GIDE. 


CONTENTS 
BOOK  I.     GENERAL   NOTIONS 

PAGE 

I.  The  Object  of  Political  Economy 1 

II.  Whether  there  are  Natural  Laws  in  Political  Economy      .        .  3 

III.  The  Formation  of  Economic  Science  ......  7 

IV.  Differences  of  Opinion  concefning  Method          ....  13 
V.     The  Various  Economic  Schools  of  Thought         ....  22 

§  1.  The  Liberal  School  - 23 

§  2.  The  Socialist  School  " 28 

§  3.  State  Socialism  .  .  .  \ 32 

§  4.  Christian  Social  Reform 35 

§  5.  The  Doctrine  of  Solidarity 38 

VI.  The  Wants  of  Man 40 

VII. '  What  is  Wealth? 46 

VIII.  What  is  Value? 49 

§  1.  Utility 52 

§  2.  Labor 59 

IX.     What  is  Price? 64 

BOOK   II.     PRODUCTION 

PART  I.    THE  FACTORS  OF  PRODUCTION 

,  ,  CHAPTER  I.     LABOR 

I.     On  the  Part  played  by  Labor  in  Production        .        .        .        .71 

II.     How  Labor  Produces 73 

III.  The  Evolution  of  Ideas  concerning  the  Productivity  of  Labor    .  75 

IV.  Pain  as  a  Factor  of  Labor 80 

V.     Time  as  a  Factor  of  Labor 83 

CHAPTER  II.     NATURE 

I.     Environment 86 

II.  Land .89 

III.  Raw  Materials 91 

IV.  The  Law  of  Diminishing  Returns 92 

ix 


X  CONTENTS 

PAGE 

V.     Motive  Forces 96 

VI.     The  Illusions  to  which  Machinery  has  given  Rise        .        .        .     103 
VII.     Whether  Machinery  is  Detrimental  to  the  Working  Glasses       .     110 

CHAPTER  III.     CAPITAL 

I.     The  Two  Concepts  of  Capital 116 

II.     The  Distinction  between  Wealth  which  is  Capital  and  Wealth 

which  is  not  Capital    ........     120 

III.  What  is  meant  by  the  "Productivity  "  of  Capital  ?    .         .        .124 

IV.  The  Durability  of  Fixed  and  of  Circulating  Capital    .        .        .127 
V.     How  Capital  is  formed 129 

PART  II.    THE  METHODS  OF  PRODUCTION 
CHAPTER   I.     THE   ORGANIZATION   OF  PRODUCTION 

I.     The  Stages  of  Industrial  Evolution 132 

II.     How  Production  is  regulated       .  137 

III.  Crises 142 

IV.  Overproduction  and  the  Law  of  Markets 147 

V.     Competition .        .        .151 

CHAPTER  II.     ASSOCIATION 

«/ 

I.     The  Successive  Forms  of  Association 156 

II.     The  Association  of  Capital .159 

III.  Large-scale  Production        ........     161 

IV.  Is  the  Tendency  toward  Large-scale  Production  Inevitable  and 

Desirable  ?  166 


CHAPTER  III.     THE   DIVISION  OF  LABOR 


I.     The  Successive  Forms  of  the  Division  of  Labor  .         .        .        .173 

II.     The  Conditions  of  the  Division  of  Labor 176 

III.     The  Advantages  and  Disadvantages  of  the  Division  of  Labor     .     178 


BOOK  III.     THE  CIRCULATION   OF  WEALTH 

CHAPTER   I.     EXCHANGE 

I.     The  History  of  Exchange 184 

II.     Exchange  Value -186 

The  Utility  Theory 189 

The  Cost  Theory 193 

III.     How  Value  is  measured  by  Exchange 196 


CONTENTS  XI 

PAGE 

IV.     The  Advantages  of  Exchange 197 

V.     The  Means  of  facilitating  Exchange 201 

VI.     History  of  the  Part  played  by  Merchants 201 

VII.     The  Means  of  Transportation 206 

VIII.  The  Division  of  Barter  into  Sale  and  Purchase  .        .        .        .210 


CHAPTER  II.  METALLIC  MONEY 

I.     The  History  of  Money 213 

II.    Is  Money  a  Superior  Kind  of  Wealth  ? 219 

III.  Disturbances  caused  by  Fluctuations  in  the  Value  of  Money      .  223 

IV.  Whether  Metallic  Money  will  continue  to  decline  in  Value        .  228 
V.     The  Conditions  which  should  be  fulfilled  by  All  Good  Money    .  232 

VI.     Gresham's  Law «.        .         .        .  237 

VII.     The  Necessity  of  employing  Several  Metals,  and  the  Difficulties 

which  result  therefrom        .        .         .        ...         .        .241 

VIII.     Why  Bimetallist  Countries  really  have  but  One  Money      .        .  246 

IX.     Whether  it  is  Advisable  to  adopt  the  Monometallic  System        .  250 


CHAPTER  III.     PAPER  MONEY 

I.     Whether  Metallic  Money  can  be  replaced  by  Paper  Money        .  258 
II.     Whether  the  Creation  of  Paper  Money  is  equivalent  to  the 

Creation  of  Wealth 265 

III.  The  Dangers  resulting  from  the  Use  of  Paper  Money,  and  the 

Way  to  prevent  them 269 

IV.  American  Paper  Money 273 

V.     How  even  Paper  Money  may  be  dispensed  with          .        .        .  280 

VI.     How  Improvements  in  Exchange  tend  to  bring  us  back  to  Barter  286 


CHAPTER  IV.     INTERNATIONAL  TRADE 

I.    The  Balance  of  Trade 291 

II.     How  the  Balance  of  Accounts  is  maintained       ....  298 

III.  The  Advantages  of  International  Trade 301 

IV.  Why  International  Trade  necessarily  is  detrimental  to  Some 

Persons 307 

V.     The  History  of  Protectionism 310 

VI.     The  Doctrine  of  Protection          .        .        .        .        .        .         .318 

VII.     The  Doctrine  of  Free  Trade 331 

VIII.    The  Relative  Importance  of  Foreign  and  Domestic  Commerce  .  346 

IX.     Some  Moderate  Forms  of  Protection  ......  35C 

X.     Commercial  Treaties   .                                                    ...  353 


Xll  CONTENTS 


CHAPTER  V.     CREDIT 

PAGE 

I.     Credit  is  only  an  Extension  of  Exchange 356 

II.     The  History  of  Credit 359 

III.  Can  Credit  create  Capital  ? 363 

IV.  The  Function  of  Banks       .        .        .        .        .        .        .        .367 

V.     Deposits .^       ....  368 

VI.     Discount 370 

VII.     The  Issue  of  Bank  Notes 375 

VIII.     Differences  between  Bank  Notes  and  Paper  Money    .        .        .  378 

IX.    The  Rate  of  Exchange 380 

X.    A  Rise  in  the  Rate  of  Discount 388 

XI.     Some  Special  Forms  of  Credit 393 

§  1.  Land  Credit 393 

§  2.  Agricultural  Credit 395 

§  3.  People's  Banks 396 

§  4.  Building  Associations 397 

XII.     Free  Banks .  399 

XIII.    The  Organization  of  Banks 402 


BOOK  IV.     DISTRIBUTION 
PART  I.    THE  VARIOUS  SYSTEMS  OF  DISTRIBUTION 

CHAPTER  I.     THE  PRESENT  SYSTEM 

I.     How  the  Distribution  of  Wealth  is  effected         .        .        .        .421 

II.     Why  this  System  of  Distribution  does  not  seem  Just          .        .  423 

HI.     The  Origin  of  the  Right  of  Property 428 

IV.     The  Evolution  of  the  Right  of  Property  with  Regard  to  its  Object  430 
V.     The  Evolution  of  the  Right  of  Property  with  Regard  to  its 

Attributes 432 

VI.     The  Inequality  of  Wealth 437 

VII.     The  Right  to  be  Idle 444 

VIII.     The  Right  to  Relief .        ,         .  447 

CHAPTER  II.     THE  SOCIALISTIC  SYSTEMS 

I.    Equal  Sharing 455 

II.     Communism 459 

III.  Saint-Simonism  and  Inheritance 464 

IV.  Collectivism 467 

V.     Cooperation 478 


CONTENTS  Xlll 

PART  II.    THE  VARIOUS  KINDS  OF  INCOME 
CHAPTER  I.     WAGES 

PAGE 

I.     Definition  of  Wages 487 

II.     History  of  the  Wage  System  -  , 488 

III.  The  Laws  of  Wages -  492 

§  1.  The  Wages  Fund  Theory        ......  497 

§  2.  The  Iron  Law  of  Wages 501 

§  3.  The  Theories  of  the  Productivity  of  Labor     .        .        .505 

IV.  The  Increase  of  Wages        ........  514 

V.     The  Hours  of  Labor 521 

VI.     Trades  Unions 528 

§  1.  Strikes 535 

§  2.  Arbitration  and  Conciliation 537 

VII.     Workingmen's  Insurance 539 

VIII.     The  Future  of  the  Wage  System         .        .        .        .        .        .  646 

CHAPTER  II.     INTEREST 

I.     The  Ownership  of  Capital 553 

II.    The  Legitimacy  of  Interest 556 

III.  History  of  Loans  at  Interest        .        .        .    '     .        .        .         .  563 

IV.  The  Laws  of  Interest 568 

V.    Does  the  Rate  of  Interest  tend  to  fall  ?                                         ,  577 


CHAPTER  III.     THE   RENT  OF  LAND 

I.     The  Law  of  Rent .  582 

II.  The  Unearned  Increment  of  Land       .         .     -    .        .         .        .  590 

III.  The  Legitimacy  of  the  Rent  of  Land 593 

IV.  The  Evolution  of  Property  in  Land 600 

V.     The  Hire  of  Land 606 

VI.  Plans  for  nationalizing  the  Land          .         .        .        ,        .        .614 

VII.     The  Subdivision  of  Property  in  Land 620 


CHAPTER  IV.     PROFITS 

I.     The  Nature  and  Definition  of  Profits 623 

II.     The  Laws  which  determine  Profits 627 

III.  The  Legitimacy  of  Profits 632 

IV.  Profit-sharing       .    ' .642 

V.     Productive  Cooperation 648 


XIV  CONTENTS 


BOOK   V.     CONSUMPTION 

PAGE 

I.    The  Nature  and  Laws  of  Consumption 655 

II.     Whether  Production  will  always  keep  Pace  with  Consumption  .  666 

CHAPTER  I.     SPENDING 

I.     Whether  Spending  helps  Business 670 

II.     Luxury 673 

III.  Consumers'  Associations 677 

IV.  The  Cost  of  Housing 681 

V.    Absenteeism        . 685 

CHAPTER  II.     SAVING 

I.    The  Conditions  necessary  for  Saving 688 

II.    Institutions  to  facilitate  Saving 692 

III.  The  Social  Utility  of  Saving 694 

IV.  Investment 697 

INDEX  .                                                                                                      ,  701 


PRINCIPLES  OF  POLITICAL  ECONOMY 


BOOK   I.     GENERAL   NOTIONS 

I.    The  Object  of  Political  Economy 

THE  heavenly  bodies,  the  earth  that  we  inhabit,  the  ele- 
ments that  it  contains,  as  well  as  the  animals  and  plants 
that  live  on  its  surface,  —  in  fact,  all  the  things  that  con- 
stitute the  material  universe  and  all  the  phenomena  that 
take  place  therein,  —  are  the  subjects  of  a  distinct  group  of 
sciences  known  as  the  physical  and  the  natural  sciences.  But 
in  this  vast  world  there  are  other  subjects  no  less  worthy  of 
study,  namely,  men  themselves,  living  in  society ;  in  fact,  they 
could  not  possibly  live  otherwise.  The  relations  that  unite 
men  socially  form  the  subject  of  a  separate  group  of  sciences, 
called  the  social  sciences.  As  there  are  among  men  many 
kinds  of  social  relations,  —  moral,  legal,  economic,  political, 
religious,  and,  finally,  linguistic  relations  which  serve  as  a 
vehicle  for  all  the  others,  —  so  there  are  many  distinct  social 
sciences,  known  as  ethics,  law,  political  economy,  politics, 
the  science  of  religions,  and  the  science  of  languages.1 

It  is  true  that  the  lines  of  demarcation  among  the  social 
sciences,  which  all  treat  ultimately  of  man  as  a  member  of 
society,  cannot  be  drawn  so  sharply  as  those  that  separate 
sciences  having  dissimilar  subjects,  such  as  geology,  botany, 
and  zoology.  Hence  the  classification  of  social  sciences  will 

1  We  do  not  mention  history  in  this  list,  because  history  has  no  distinct 
subject-matter  of  its  own.  Every  social  science,  and  even  every  natural 
science,  has  its  history,  which  is  the  study  of  the  same  class  of  facts  from 
the  standpoint  of  their  succession  in  time. 


2  PRINCIPLES   OF   POLITICAL   ECONOMY 

always  be  more  or  less  artificial,  made  to  facilitate  study  and 
to  help  overcome  the  limitations  of  our  understanding  rather 
than  to  indicate  any  natural  separation  of  them.1  Indeed, 
the  frontiers  of  these  sciences,  especially  of  those  most  closely 
related  to  each  other,  —  ethics,  jurisprudence,  and  politi- 
cal economy,  —  will  always  be  somewhat  indefinite;  some 
institutions,  as,  for  example,  property,  inheritance,  and  the 
wage  system,  fall  clearly  within  the  scope  of  all  three.  This 
fortunate  interdependence,  moreover,  is  helpful  to  each  of 
these  sister  sciences.  We  need  only  observe  that  the  same 
subject  may  be  studied  from  distinctly  different  points  of 
view,  and  bear  in  mind  the  dissimilar  standpoints  of  the 
moralist,  the  lawyer,  and  the  economist.  This  is  not  diffi- 
cult. To  do  our  duty,  to  exercise  our  rights,  to  satisfy  our 
wants,  are  three  quite  different  aims  of  human  activity ;  and 
only  the  last  of  these  is  the  proper  subject  of  economic 
science.  We  may  say,  therefore,  that  political  economy  has 
to  do  with  the  relations  of  men  living  in  society,  so  far  as 
these  relations  tend  to  satisfy  the  wants  of  life  and  concern 
the  efforts  made  to  provide  for  all  that  is  generally  under- 
stood by  material  welfare.2 

At  present  there  is  a  tendency  to  divide  the  science  into 
two  studies,  pure  political  economy  and  social  economics,  which 

1  Augusts  Comte  considered  it  irrational  to  separate  the  sciences  that 
treat  of  human  societies.     He  maintained  that  there  should  be  but  one  social 
science,  covering  all  the  aspects  of  social  life,  and  to  this  science  he  gave  the 
name  "sociology,"  which  has  since  become  classical.      He  expressly  con- 
demned every  effort  to  make  political  economy  a  distinct  science.      It  is 
in  one  sense  true  that  all  social  sciences  partake  of  the  unity  of  human 
nature,  but  in  the  light  of  good  scientific  methods  we  cannot  gainsay  the 
right  to  keep  the  above-named  social  sciences  apart  as  distinct  fields  of  study. 

2  Formerly  it  was  customary  to  say  (and  it  is  often  said  to-day)  that 
political  economy  is  the  "science  of  wealth."     But  this  definition  has  the 
disadvantage  of  turning  attention  away  from  the  real  subject  of  economics, 
which  is  man  and  his  wants,  and  concentrating  it  on  exterior  objects  which 
are  only  means  for  the  satisfaction  of  human  wants.     This  is  not  a  mere 
question  of  words,  for  the  erroneous  point  of  view  has  exposed  many  econo- 
mists to  the  justifiable  reproach  of  reasoning  as  though  man  were  made  for 
wealth,  and  not  wealth  for  man. 


NATURAL   LAWS  3 

differ  less  in  their  content  than  in  the  manner  of  approach- 
ing the  subjects  they  both  treat. 

On  the  one  hand,  pure  political  economy  (sometimes  called 
abstract  economics  or  simply  economics)  is  supposed  to  in- 
vestigate those  relations  that  arise  naturally  among  men 
living  together,  just  as  though  we  were  studying  the  rela- 
tions among  material  lifeless  bodies  of  any  kind  —  what 
Montesquieu  called  "the  necessary  relations  which  result 
from  the  nature  of  things."  It  does  not  undertake  to  pass 
judgment  on  these  relations  from  either  the  moral  or  the 
practical  standpoint,  but  attempts  simply  to  explain  what 
these  relations  are.  In  this  respect  it  may  be  said  to  re- 
semble any  natural  or  exact  science,  since  it  endeavors  to 
explain  matters  just  as  they  happen  to  be,  without  question- 
ing their  desirability. 

On  the  other  hand,  social  economics  is  supposed  to  study 
chiefly  the  voluntary  relations  which  men  have  established 
among  themselves  in  the  form  of  social  organizations,  written 
laws,  customs,  or  other  institutions  having  for  their  object 
the  improvement  of  social  conditions.  It  purposes  to  inves- 
tigate and  devise  means  by  which  better  conditions  may  be 
attained.  Hence  it  is  more  closely  allied  to  the  moral 
sciences.1 

II.   Whether  there  are  Natural  Laws  in  Political  Economy 

When  we  grant  to  any  branch  of  human  knowledge  the 
name  of  science,  our  object  is  not  the  simple  bestowal  of  an 
honorary  title.  We  mean  that  the  facts  with  which  it  deals 
are  connected  by  certain  necessary  relations  which  have  been 
discovered,  and  which  are  called  laws. 

1  The  division  here  made  must  not  be  mistaken  for  that  which  distinguishes 
theoretical  from  applied  or  practical  economics.  Political  economy  always 
comprises  a  practical  part  which  takes  up  the  best  means  of  utilizing  the 
natural  laws  discovered  by  the  science  ;  i.e.  such  means  as  banks,  railroads, 
monetary  and  commercial  systems,  taxes,  etc.  Social  economics,  on  the 
other  hand,  since  it  seeks  to  determine  what  ought  to  be,  i.e.  the  relations 
which  should  in  justice  prevail  among  men,  always  embraces  a  theoretical  part. 


4  PRINCIPLES   OF   POLITICAL   ECONOMY 

In  some  domains  the  regularity  of  occurrences  is  so  obvious 
as  to  attract  the  attention  even  of  persons  least  accustomed 
to  scientific  speculation.  A  mere  glance  at  the  firmament 
is  enough  to  show  the  regular  nightly  progress  of  the  stars, 
the  monthly  succession  of  the  phases  of  the  moon,  and  the 
annual  journey  of  the  sun  through  the  constellations.  In 
the  most  remote  days  of  history,  shepherds  watching  their 
flocks  and  sailors  steering  their  vessels  discovered  the  peri- 
odicity of  these  movements,  and  thus  paved  the  way  for  a 
true  science,  the  oldest  of  all  sciences,  —  astronomy. 

The  changes  that  take  place  in  the  constitution  of  inor- 
ganic matter  and  organic  bodies  are  not  so  simple  as  this, 
and  the  uniformity  of  their  coexistence  and  succession  is 
not  so  easy  to  comprehend.  Many  centuries,  therefore,  had 
to  elapse  before  the  human  mind,  bewildered  by  the  com- 
plexity of  things,  succeeded  in  laying  hold  of  the  guiding 
thread,  in  finding  law  and  regularity  in  these  phenomena 
as  well,  and  thus  in  establishing  the  sciences  of  physics, 
chemistry,  and  biology.  Little  by  little  the  idea  of  a 
permanent  regularity  of  phenomena  has  penetrated  all 
domains  of  human  knowledge,  even  those  which  at  first 
seemed  destined  to  remain  forever  closed  to  it.  Even 
the  winds  and  waves,  which,  from  time  immemorial,  poets 
have  made  the  emblem  of  inconstancy  and  capriciousness, 
have  been  brought  under  the  sway  of  universal  law.  The 
great  laws  which  govern  currents  of  air  and  of  water  have 
been  discovered,  and  now  form  the  basis  of  meteorology. 
Even  the  chances  of  wagers,  the  probable  combinations  of 
numbers  in  a  throw  of  dice,  have  been  subjected  to  cal- 
culation. Hazard  itself  may  henceforward  be  said  to  have 
its  laws. 

The  time  was  of  course  bound  to  come  when  the  great  idea 
of  a  natural  order  of  things,  after  having  step  by  step  success- 
fully invaded  all  other  fields  of  knowledge,  should  at  last 
penetrate  the  domain  of  social  facts.  The  honor  of  having 
first  recognized  and  proclaimed  the  existence  of  a  "  natural 


NATURAL   LAWS  5 

government "  of  society  is  due,  as  we  shall  see,  to  Montes- 
quieu and  the  Physiocrats. 

Yet  there  are  many  who  hesitate  to  put  the  social  sciences 
on  a  level  in  this  respect  with  the  physical  sciences.  It 
seems  to  them  that  there  is  between  these  two  classes  of 
sciences  an  insurmountable  barrier,  and  that  the  latter 
belong  to  the  realm  of  inexorable  Necessity,  while  the 
former  belong  to  the  realm  of  Liberty.  They  believe  that 
the  physical  sciences  have  to  do  with  matters  that  cannot 
help  taking  place,  while  the  social  sciences  are  concerned 
with  things  that  may  or  may  not  take  place,  according  as  we 
choose.  In  the  physical  sciences,  the  savant  can  always 
foresee  exactly  what  fact  will  succeed  or  accompany  another 
given  fact.  Thus  the  astronomer  can  announce  a  thousand 
years  in  advance  the  exact  minute  when  an  eclipse  will  take 
place.  The  chemist  combining  two  substances  in  a  crucible 
knows  just  what  compound  will  result  and  what  its  proper- 
ties will  be.  The  same  power  enables  the  geologist  to 
enumerate  the  various  strata  that  will  be  encountered  in 
piercing  a  tunnel  or  in  sinking  a  mine-shaft.  But,  it  is 
asked,  can  the  economist,  the  historian,  and  the  statesman  tell 
us  anything  [in  advance  concerning  social  and  political 
events  ?  Is  it  not  true  that,  at  the  most,  they  can  but 
venture  conjectures  which  are  as  often  as  not  discredited  by 
actual  occurrences  ?  Prophecy  or  prevision  may  sometimes 
be  possible  to  the  intuitive  mind  of  a  genius,  but  in  the 
social  sciences  scientific  prediction  is  impossible. 

The  above  argument  is  based  on  a  twofold  error,  regard- 
ing the  meaning  of  the  expressions  "  natural  law  "  and  "  free 
will."  We  are  in  the  habit  of  representing  natural  law 
figuratively  as  an  inflexible,  unchangeable  power,  command- 
ing unconditional  obedience.  But  natural  law  is  really 
nothing  more  than  the  expression  of  certain  relations  which 
arise  spontaneously  among  things  or  among  men.  These 
relations  may,  to  be  sure,  be  called  necessary  ones,  but 
only  when  certain  foregoing  conditions  are  fulfilled.  Atoms 


6  PRINCIPLES    OF   POLITICAL   ECONOMY 

of  hydrogen  and  oxygen  do  not  necessarily  produce  water  ; 
but  if  one  atom  of  oxygen  is  placed  in  contact  with  two 
of  hydrogen  under  certain  conditions  of  temperature,  press- 
ure, etc.,  they  will  form  water.  Similarly,  men  are  not 
obliged  to  buy  and  sell,  but  if  a  man  disposed  to  sell  meets  a 
man  disposed  to  buy,  and  if  their  offers  are  mutually  accept- 
able, they  will  necessarily  make  a  transaction  at  a  price 
which  may  be  determined  ;  and  this  transaction  will  be  none 
the  less  a  free  contract. 

Free  will  is  commonly  understood  to  mean  the  power  to 
do  just  as  one  pleases,  without  cause  or  reason.  To  act 
without  an  appreciable  cause,  however,  is,  as  a  little  reflec- 
tion will  show,  precisely  what  a  madman  does.  The  conduct 
of  every  reasonable  man  is  determined  by  motives,  and 
there  are  always  sufficient  causes,  known  or  unknown,  for 
his  actions.1 

Even  those  practical  people  who  most  vehemently  deny 
that  economists  can  foretell  happenings  in  the  economic  world 
constantly  employ  the  art  of  prevision  in  the  ordinary  course 
of  their  lives,  and  in  the  management  of  their  everyday 
affairs.  Every  one  who  speculates  —  and  who  is  there  that 
does  not  speculate  to  some  extent  —  resorts  to  prediction 
after  his  own  fashion.  The  financier  who  purchases  shares 
in  a  railroad  company  foresees,  or  thinks  he  foresees,  the  pro- 
gressive increase  of  traffic  along  a  certain  line  ;  and  the  high 
price  he  pays  for  these  shares  indicates  (whether  he  wills  or 
not)  his  firm  confidence  in  the  permanency  and  validity  of 
an  economic  law.  It  is  evident,  however,  that  everybody 

1  Renouvier,  in  his  "  Classification  des  SystemesPhilosophiques,"  has  called 
attention  to  the  fact  that  even  if  the  conduct  of  men  were  the  result  of  acci- 
dent, pure  and  simple,  rational  prevision  and  prophecy  could  readily  take 
place  within  the  limits  we  have  indicated,  because  the  mathematical  doctrine 
of  probabilities  enables  us  to  foretell,  for  instance,  how  often  a  given  number 
will  come  out  in  a  game  of  roulette.  How  much  more  ought  it  to  be  possible, 
therefore,  to  foretell  the  conduct  of  rational  beings  !  If  we  had  to  do  with 
men  infinitely  wise,  it  is  probable  that  the  prevision  of  human  conduct  would 
become  as  infallible  as  the  prescience  of  the  movements  of  heavenly  bodies. 


.   THE   FORMATION    OF    ECONOMIC    SCIENCE  7 

who  travels,  or  sends  goods   by  this  railroad,  does  so  only 
because  he  chooses  to  do  so,  i.e.  because  he  wills  to  do  so. 

Without  doubt,  economic  prophecies  are  often  shown  to  be 
false  by  subsequent  events.1  But  if  our  previsions  in  polit- 
ical economy  are  uncertain,  and  do  not  penetrate  far  into 
the  future,  the  reason  for  this  must  not  be  sought  in  the 
play  of  free  will,  but  simply  in  our  ignorance  of  the  causes 
at  work,  —  just  as  in  meteorology,  for  instance.  Every 
thinking  man  is  sure  that  wind,  rain,  hail,  and  storms  are 
not  the  result  of  mere  chance  ;  he  does  not  for  a  moment 
doubt  that  they  are  governed  by  natural  laws.  Yet  pre- 
visions in  this  domain  are  by  no  means  more  accurate  than 
in  the  domain  of  economics.  A  commercial  crisis  can  be 
foretold  a  much  longer  time  in  advance  than  the  coming 
of  a  cyclone  ;  the  trips  of  a  railroad  train  between  two 
cities  are  certainly  less  variable  than  the  tides  of  streams, 
despite  the  fact  that  the  former  are  regulated  by  man,  <  and 
the  latter  determined  by  the  forces  of  nature. 

III.    The  Formation  of  Economic  Science 

In  a  French  book  by  Antoine  de  Montchretien,  entitled, 
"Traicte'  de  I'CEconomie  Politique,"  the  science  of  political 
economy  in  1615  first  received  the  name  now  applied  to  it. 
The  word  economy,  or  economics,  was,  however,  already  in 
use  before  that  date,  and  one  of  the  books  of  Xenophon  even 
bears  this  word  as  a  title.  But  for  the  ancients  it  meant 
what  we  may  call  domestic  economics,  or  household  economy 
(oZ/co?,  household,  and  Z/O'/AO?,  law  or  rule).  The  qualifying 
adjective,  political,  indicated  that  the  science  had  to  do,  not 
with  the  economy  of  the  household,  but  with  that  of  the  body 

1  As  an  argument  against  the  existence  of  natural  laws  in  social  matters, 
the  fact  is  adduced  that  many  things  do  not  take  place  in  the  way  foreseen. 
But  what  does  this  prove  save  our  ignorance  ?  Think,  on  the  other  hand, 
how  often  things  fail  to  happen  as  willed  or  desired  !  Does  not  this  demon- 
strate that  there  are  stronger  forces  at  work  in  the  world  than  the  will  or 
desires  of  men  ? 


8  PRINCIPLES    OF    POLITICAL   ECONOMY 

politic,  or  the  nation.  This  new  designation  arose  at  a  time 
when  an  important  historical  transformation  was  taking  place : 
the  establishment  of  the  great  modern  states  of  Europe.  To- 
day, as  we  have  already  said,  the  name  social  economics  is 
often  used  in  place  of  political  economy  ;  and  although  the 
etymological  meaning  of  these  words  is  exactly  the  same, 
the  adjective  political  is  preferable  because,  like  economy, 
it  is  of  Greek  origin.  At  present,  hoAvever,  these  terms 
have  a  different  meaning,  which  we  have  already  explained. 

Some  of  the  questions  which  are  to-day  called  economic, 
have  at  all  times  attracted  the  attention  of  mankind,  —  such 
questions  as  money,  commerce,  and  the  means  by  which  citi- 
zens and  the  state  may  grow  wealthy.  The  mediaeval  church 
fathers  condemned  luxury,  the  inequality  of  fortunes,  and 
loans  at  interest.  The  authors  of  antiquity,  Aristotle  among 
others,  carefully  analyzed  the  nature  of  money,  the  separation 
of  trades,  and  the  methods  of  acquiring  property.  But  they 
failed  to  perceive  the  bond  that  unites  these  different  prob- 
lems. They  did  not  conceive  the  possibility  of  making  these 
matters  the  object  of  a  completely  distinct  science,  and  re- 
garded them  rather  as  the  accomplishments  of  a  philosopher 
than  as  the  equipment  of  a  scientist.  Whatever  was  pro- 
posed regarding  these  matters  was  offered  in  the  form  of 
good  advice  to  sovereigns  and  individuals,  not  as  the  firm 
results  of  an  established  science. 

The  discovery  of  America  gave  the  first  impetus  to  the 
development  of  a  true  economic  science  in  the  course  of  the 
sixteenth  and  seventeenth  centuries  ;  what  had  previously 
been  mere  incoordinate  advice  took  the  shape  of  a  composite, 
coordinate,  logical  system  of  doctrines.  Countries  like 
France,  Italy,  and  England,  seeing  with  envious  eyes  how 
Spain  was  becoming  wealthy  by  means  of  her  mines  in  the 
New  World,  sought  to  discover  how  they  too  might  procure 
gold  and  silver.  This  was  precisely  the  title  of  a  book 
published  by  an  Italian,  Antonio  Serra,  in  1613  (before  that 
of  Montchretien),  viz.,  "  A  Brief  Discourse  on  the  Possible 


THE   FORMATION    OF    ECONOMIC    SCIENCE  9 

Means  of  causing  Gold  and  Silver  to  abound  in  Kingdoms 
where  there  are  no  Mines."  It  was  believed  that  this  means 
consisted  in  the  sale  abroad  of  manufactured  products  ;  and, 
with  this  purpose  in  view,  efforts  were  made  to  develop 
foreign  trade  and  home  manufactures  by  an  elaborate,  com- 
plicated, and  vexatious  system  of  regulations  to  which  the 
name  mercantile  system  has  generally  been  applied. 

A  strong  reaction  against  these  doctrines  took  place  in  the 
middle  of  the  eighteenth  century,  especially  in  France.  At 
this  time  the  uppermost  thought  in  the  minds  of  people 
seemed  to  be  a  return  to  the  u  state  of  nature,"  and  the 
repudiation  of  all  artificial  arrangements.  All  the  literature 
of  the  eighteenth  century  is  impregnated  with  this  feeling. 
Its  influence  is  manifest  in  the  political  science  of  the  period, 
and  in  the  writings  of  Rousseau  and  Montesquieu.  Montes- 
quieu's book  on  the  "  Spirit  of  Laws "  begins  with  the 
immortal  phrase,  "  Laws  are  the  necessary  relations  result- 
ing from  the  nature  of  things;  "  and  in  the  preface  of  the  same 
work  he  declares,  "  I  have  not  drawn  my  principles  from 
my  prejudices,  but  from  the  nature  of  things." 

It  was  then  that  economic  science  really  began.  In  1758, 
one  of  the  physicians  of  the  French  king  Louis  XV,  named 
Quesnay,  published  his  "  Tableau  Economique."  x  A  group 
of  eminent  men  soon  became  his  disciples  and  adopted  the 
name  of  physiocrats  2  or  economists.  The  physiocratic  school 
introduced  two  new  ideas  in  economic  science,  —  ideas  that 

1  In   1755    Cantillon  had  published  his  "  Essai  sur  la  Nature  du  Com- 
merce," written  as  early  as  1725.     This  book  has  recently  been  brought  to 
light  again  by  English  economists,  and  is  by  one  of  them  designated  as  the 
first  methodical  treatise  on  political   economy.     The  work,   however,  was 
generally  unknown,  and  has  exerted  an  influence  on  the  development  of  the 
science  only  through  the  physiocrats,  who  were  familiar  with  it,  and  bor- 
rowed much  from  its  contents. 

2  Physiocracy  is  composed  of  two  Greek  words  meaning  the  "government 
of  nature."     One  of  the  most  illustrious  disciples  of  this  school,  Turgot,  not 
only  laid  down  its  principles  in  his  remarkable  writings,  but  actually  applied 
them  during  his  terms  of  office  as  intendant  of  Limoges  and  later  as  min- 
ister to  Louis  XVI  of  France  ;  he  decreed  the  freedom  of  trade,  the  abolition 


10  PRINCIPLES   OF   POLITICAL   ECONOMY 

were  diametrically  opposed  to  the  mercantile  system.     These 
were  :  — 

(1)  The   superiority  of    agriculture   over  commerce,   and 
industry.      The  physiocrats  regarded  only  the  soil  as  the 
source  of  wealth,  because  it  alone  gives  a  net  product.     The 
classes  of  society  other  than  farmers  are  sterile  classes. 

(2)  The  existence  of  a  "natural  and  essential  order  of 
human  societies  "  —  these  very  words  form  the  title  of  a  book 
written  by  one  of  the  physiocrats,  Mercier  de  la  Riviere  — 
which  we  should  learn  to  recognize,  and  to  which  we  should 
strive  to  conform.     They  therefore  declared  that  it  is  useless 
to  devise  laws,  regulations,  and  systems,  when  all  that  we 
need  do  is  to  let  things  alone. 

The  first  of  these  principles,  although  it  brought  about  a 
fortunate  reaction  against  the  errors  of  the  mercantile  sys- 
tem, was  partly  erroneous,  or  at  least  exaggerated  ;  and  the 
error  or  exaggeration  led  to  the  destruction  of  the  new 
school.  The  second  principle,  on  the  other  hand,  served 
during  nearly  a  century  as  the  foundation  of  the  whole 
edifice  of  political  economy.,  And  it  is  true  that  facts  in 
themselves  cannot  form  the  basis  of  a  science  unless  we  have 
discovered  that  they  are  bound  together  by  relations  of  cause 
and  effect,  —  that  they  form  an  "  essential  and  natural 
order." 

The  publication  in  1776  of  "  An  Inquiry  into  the  Nature 
and  Causes  of  the  Wealth  of  Nations  "  by  a  Scotch  professor, 
Adam  Smith,  marks  an  era  in  the  history  of  political  econ- 
omy. During  nearly  one  hundred  years  this  book  has 
assured  the  unquestioned  preeminence  of  the  English  school 
of  economists.  It  procured  for  its  author  the  title,  not  fully 
deserved,  of  "father  of  political  economy." 

Adam  Smith  rejects  the  first  physiocratic  principle  and 
gives  industry  its  legitimate  place  in  the  creation  of  wealth. 
But  he  confirms  and  develops  most  brilliantly  the  second 

of  interior  duties  and  the  tariff  on  wheat,  and  the  liberty  of  labor  (by  abol- 
ishing trade  corporations  or  guilds). 


THE   FORMATION    OF   ECONOMIC   SCIENCE  11 

tenet,  i.e.  the  existence  of  natural  economic  laws,  and  the  let- 
alone  policy,  at  least  as  a  rule  of  practical  conduct.  He 
was,  moreover,  much  superior  to  the  physiocrats  in  ob- 
serving facts  and  in  profiting  by  the  lessons  of  history. 
His  studies  extended  over  nearly  the  whole  field  of  eco- 
nomic science,  which  has  scarcely  been  enlarged  since  his 
time. 

Only  a  short  while  after  Adam  Smith,  three  economists 
came  forward  almost  simultaneously  with  theories  that  have 
occupied  the  minds  of  men  for  half  a  century.  Two  of 
these  economists  were  Englishmen.  The  first,  Malthus,  is 
the  author  of  a  celebrated  theory  concerning  the  increase  of 
population,1  which,  although  it  concerned  a  matter  of  a 
somewhat  special  nature,  was  destined  to  have  a  great  influ- 
ence upon  the  whole  science  of  economics.  The  second  was 
Ricardo,2  quite  as  celebrated  because  of  his  theory  of  the 
rent  of  land,  but  whose  misuse  of  the  abstract  and  purely 
deductive  method  of  investigation  later  gave  rise  to  a 
vigorous  reaction.  The  third  author  of  this  group  was  a 
Frenchman,  Jean  Baptiste  Say,3  whose  "  Traite  d'Economie 

1  The  Rev.  Thomas  R.  Malthus  first  published  his  book  anonymously  in 
1798  under  the  title,  "  An  Essay  on  the  Principle  of  Population  as  it  affects 
the  Future  Improvement  of  Society."     The  Essay  passed  through  six  edi- 
tions in  the  author's  lifetime,  and  in  each  of  them  he  introduced  various  addi- 
tions and  corrections.     Although  the  last  edition  is  dated  1826,  that  of  1817 
is  the  last  that  was  fully  revised  by  the  author,  and  presents  the  text  sub- 
stantially as  it  has  since  been  reprinted.     A  cheap  edition  is  published  by 
Ward,  Lock  &  Co.  (1890).     A  good  selection  of  chapters  from  the  book  is 
contained  in  the  "Economic  Classics"  edited  by  Professor  W.  J.  Ashley, 
and  published  by  the  Macmillan  Co.     The  student  of  Malthusian   theories 
should  consult  James  Bonar's  "Malthus  and   his  Work"   (London,  1885) 
and  a  keen  criticism  of  the  Malthusian  theory  of  population  by  Dr.  Frank 
Fetter,    "  Versuch    einer  Kritik    der    Malthus'chen    Bevoelkerimgslehre  " 
(Jena,  1895). 

2  David  Ricardo's  principal  work  is  the  "  Principles  of  Political  Economy 
and  Taxation."     The  first  edition  appeared  in  1817;  the  third,  with  many 
additions,  in  1821.    The  best  edition  now  in  use  is  probably  E.  C.  K.  Gon- 
ner's,  published  in  the  "  Bohn  Library,"  London,  1891. 

3  Say's  book  has  been  translated  into  English  by  C.  R.  Prinsep,  who  pre- 
pared a  so-called  "Fourth  American  Edition"  in  1830  under  the  title  "A 


12  PRINCIPLES    OF    POLITICAL   ECONOMY 

Politique,"  published  in  1803,  is  remarkable  for  its  clear 
style,  its  systematic  arrangement  and  logical  classification, 
rather  than  for  depth  of  thought.  Translated  into  all  the 
languages  of  Europe,  this  book  was  the  first  truly  popular 
treatise  on  political  economy,  and  has  served  more  or  less 
frequently  as  a  model  for  the  innumerable  well-known  man- 
uals of  economics  that  have  been  written  since  then. 

It  was  particularly  Say's  book  that  set  forth  clearly  (with 
some  exaggeration,  but  an  exaggeration  that  was  salutary  at 
that  formative  period  of  the  science)  the  prevailing  concep- 
tion of  political  economy  as  a  natural,  purely  expository 
science.  Adam  Smith  had  defined  economics  as  "proposing 
to  enrich  both  the  people  and  the  sovereign,"  thus  giving  a 
practical  aim  and  purpose  to  the  study.  But  Say,  amending 
this  definition,  writes,  "  I  had  rather  say  that  the  object  of 
political  economy  is  to  make  known  the  means  by  which 
wealth  is  produced,  distributed,  and  consumed,"  and  he 
named  his  book  accordingly.1 

Thus  political  economy  was  firmly  established  in  its  classi- 
cal form.  From  this  time  on,  there  arose  a  large  number  of 
"  schools  "  whose  differences  of  opinion  we  shall  now  briefly 
indicate.2 

Treatise  on  Political  Economy,  or  the  Production,  Distribution  and  Con- 
sumption of  Wealth." 

1  "Traite  d' Economic  politique  ou  simple  exposition  de  la  maniere  dont 
se  forment,  se  distribuent  et  se  consomment  les  richesses." 

2  The  best-known  general  histories  of  political  economy  are :  — 
Ingrain,  "A  History  of  Political  Economy."     Written  from  the  stand- 
point of  an  adherent  of  the  "historical"  school. 

Blanqui,  "  History  of  Political  Economy  in  Europe."  Rather  a  history 
of  economic  policies  than  of  economic  theories  and  doctrines.  This  book, 
moreover,  is  not  up  to  date,  but  does  contain  good  chapters  on  antique, 
mediaeval,  and  early  modern  economic  systems. 

Cohn,  "  History  of  Political  Economy."  Supplement  to  the  Annals  of 
the  American  Academy  of  Political  and  Social  Science,  Philadelphia,  1894. 

Cossa,  "  An  Introduction  to  the  Study  of  Political  Economy."  London, 
1893.  This  book  contains  an  Historical  Part  giving  extensive  biographical 
and  bibliographical  notices.  It  is,  however,  scarcely  a  book  for  beginners, 
besides  being  a  poor  translation  of  the  Italian  original. 


DIFFERENCES    OF   OPINION   CONCERNING   METHOD        13 

IV.    Differences  of  Opinion  concerning  Method1 

In  scientific  language  the  term  "  method  "  is  used  to  desig- 
nate the  road  that  must  be  followed  to  lead  to  the  discovery 
of  truth. 

The  classical  school  of  economics,  especially  as  represented 
by  Ricardo,  preferred  to  employ  the  deductive  method.  This 
method  starts  from  certain  general  data  that  are  conceded  to 
be  beyond  dispute,  and  then  by  way  of  ratiocination  pro- 
ceeds to  deduce  an  infinite  series  of  propositions.  Geometry 
may  be  taken  as  a  type  of  the  sciences  that  employ  the 
deductive  method.  Law  students  will  readily  recognize  that 
law  itself,  particularly  Roman  law,  employs  the  deductive 
method  ;  the  Roman  jurist,  starting  from  a  few  principles 
laid  down  by  the  Twelve  Tables  or  found  in  the  jus  gentium, 
proceeded  to  construct  that  huge  monument  of  learning 
called  the  Pandects.  Similarly,  in  economic  science,  the 
classical  school  began  with  the  celebrated  axiom  that  "  man 

Eisenhart,  "  Geschichte  der  National-Oekonomik."  Second  edition,  Jena 
1891.  Probably  the  most  available  of  German  histories,  very  suggestive  and 
deserving  English  translation. 

Moritz  Meyer,  "Die  neuere  Nationaloekonomie."  A  brief  but  good 
account  of  economic  science  since  Adam  Smith,  with  special  reference  to  the 
historical  and  socialistic  tendencies. 

Espinas,  "  Histoire  des  Doctrines  Economiques. "  Paris,  Colin  &  Cie. 
An  excellent  little  history  for  the  period  of  Adam  Smith  and  preceding 
epochs,  but  entirely  inadequate  for  those  that  follow. 

Price,  "A  History  of  Political  Economy  in  England"  is  a  convenient 
little  volume  on  the  history  of  English  economic  theories. 

Roscher,  "Geschichte  der  National-Oekonomik  in  Deutschland"  is  typi- 
cal of  the  thoroughness  and  erudition  of  the  author,  one  of  the  foremost  Ger- 
man economists  of  the  historical  school. 

Slock,  "  Les  Progres  de  la  Science  Economique  depuis  Adam  Smith." 
Second  edition,  two  volumes.  This  book,  written  by  a  man  who  had  charge 
of  the  book-reviewing  department  of  the  French  "  Journal  des  Economistes," 
from  the  "  classical  "  point  of  view,  is  not  chronologically  arranged,  but 
divided  according  to  doctrines,  —  each  doctrine  being  considered  separately 
in  the  changes  that  it  has  undergone  since  Adam  Smith. 

1A  fine  discussion  of  methods  will  be  found  in  Keynes,  "Scope  and 
Method  of  Political  Economy."  Macmillan,  1891. 


14  PRINCIPLES   OF   POLITICAL  ECONOMY 

always  seeks  to  obtain  a  maximum  of  satisfaction  with  a 
minimum  of  trouble  "  and  a  few  other  principles,  such  as  the 
law  of  the  diminishing  returns  of  land,  and  thence  deduced 
a  series  of  corollaries  that  still  constitute  the  framework  of 
economic  science. 

A  new  school,  called  historical,  or  realistic,  employs  and 
recommends  the  inductive  method,  —  the  method  that  Bacon 
introduced  in  the  physical  and  the  natural  sciences  a  few  cen- 
turies ago,  and  which  has  given  such  marvellous  results.  It 
starts  from  the  observation  of  certain  definite  facts,  and  bases 
its  general  propositions  upon  these  observed  facts.  For  ex- 
ample :  ihQ/act  that  all  bodies  fall,  leads  to  the  law  of  gravi- 
tation. In  the  field  of  economics  this  method  consists  in  the 
patient  and  accumulated  observation  of  all  social  facts  as  they 
are  revealed  to  us,  whether  in  the  present  by  means  of  statis- 
tics or  information  supplied  by  travellers,  or  in  the  past  by 
means  of  history. 

Indeed,  history,  by  informing  us  how  economic  and  social 
institutions  arose,  and  how  they  have  been  transformed,  is 
peculiarly  fitted  to  throw  light  upon  the  true  character  of 
social  facts.1 

Now  institutions  studied  from  the  historical  point  of  view 
are  known  to  differ  considerably  from  nation  to  nation,  and 
from  time  to  time  within  one  and  the  same  country.  The 
twofold  characteristic  of  universality  and  permanency,  which 
the  classical  school  attributed  to  economic  phenomena,  and 
to  which  it  gave  the  pompous  name  of  "  natural  law,"  thus 
vanishes  into  thin  air.  We  no  longer  attempt  to  discover 
general  laws  governing  abstract  man,  but  historical  laws 
governing  the  relations  among  men  living  in  a  given  nation 
at  a  given  epoch.  For  this  reason  the  name  "  national "  is 
sometimes  applied  to  this  school  of  political  economy. 

1  The  historical  school  of  economics,  like  the  historical  school  of  jurispru- 
dence founded  by  Savigny,  first  arose  in  Germany.  It  may  be  said  to  date 
from  the  publication  of  Professor  Reseller's  treatise  on  political  economy  in 
1854,  although  books  by  Professor  Hildebrand  (1848)  and  Professor  Knies 
(1853)  decidedly  manifested  the  same  point  of  view. 


DIFFERENCES   OF   OPINION   CONCERNING  METHOD        15 

The  method  just  described  is  safer  than  the  other,  since  it 
abstains  from  all  sweeping  generalizations.  But  is  it  as  fruit- 
ful ?  Probably  not.  It  is  indeed  a  delusion  to  suppose  that 
the  use  of  the  purely  inductive  method  can  ever  be  as  effica- 
cious in  the  social  sciences  as  in  the  physical  and  the  natural 
sciences.  There  are  two  reasons  for  this.  First,  because  the 
observation  of  facts  is  more  difficult  in  the  social  sciences. 
Although  at  first  it  may  seem  paradoxical  to  declare  that  it 
is  harder  to  observe  facts  that  concern  us  so  closely  as  these, 
and  in  regard  to  which  we  are  not  only  spectators,  but  actors 
also,  yet  this  is  the  very  reason  which  keeps  us  from  seeing 
them  clearly  !  Furthermore,  social  facts  are  infinitely  more 
diversified  ;  whoever  has  seen  one  grasshopper  may  be  said 
to  have  seen  them  all ;  but  whoever  has  seen  one  miner 
cannot  be  said  to  know  very  much  about  the  condition  of 
mining  laborers.  In  reality,  the  observation  of  economic 
and  social  facts  is  a  task  far  beyond  the  capacities  of  any 
single  person,  and  one  which  can  only  be  accomplished  by 
the  collective  labor  of  thousands  who  unite  the  results  of 
their  observation,  or  of  states  employing  for  this  purpose 
the  potent  means  of  investigation  which  governments  have 
at  their  disposal.1  Joint  observations  of  this  sort  have  been 
made  the  object  of  a  distinct  science  called  statistics. 

The  mere  observation  of  facts,  moreover,  would  never  have 
given  the  marvellous  results  obtained  in  the  natural  sciences, 
were  it  not  for  the  help  of  a  particular  method  of  observation, 
used  under  prearranged  circumstances  and  called  experi- 
ment. But  in  the  social  sciences  experiments  are  difficult, 
if  not  impossible.  The  chemist,  the  physicist,  and  even  the 
biologist  (although  the  latter  encounters  greater  difficulties) 
can  always  take  a  single  fact,  which  he  wants  to  study,  and 

1  One  of  the  most  elementary  of  social  facts  is  assuredly  the  population  of 
a  given  group.  Yet  is  it  not  evident  that  a  single  observer  is  almost  power- 
less to  ascertain  this  fact  ?  Only  our  governments  are  in  a  position  to  under- 
take successfully  such  a  task  ;  and  only  very  recently  have  even  our  official 
censuses  attained  a  tolerable  degree  of  accuracy. 


16  PRINCIPLES   OF   POLITICAL   ECONOMY 

subject  it  to  artificially  determined  conditions  which  may  be 
varied  at  will.  In  order,  for  instance,  to  study  the  breathing 
of  an  animal,  he  can  place  it  under  the  bell-jar  of  ari  air- 
pump,  and  regulate  the  air-pressure  exactly  to  suit  the  re- 
quirements of  the  experiment.  But  the  economist,  even 
though  he  be  also  a  law-giver  or  an  omnipotent  despot,  does 
not  possess  this  power  to  experiment  at  will.  The  reasons 
for  this  are  as  follows  :  — 

(1)  He  cannot  make  prearranged  experiments  unless  he 
has  at  his  service  an  all-powerful  despot.     Consequently, 
instead    of    directly   arranging    social   experiments,    he    is 
obliged  to  wait  for  experiments  to  take  place  of  their  own 
accord,    as   it  were  ;    a  fortunate   hazard   may   thus   under 
certain  peculiar  circumstances  provide  experiments  worthy 
of  study.       The  application,    for   instance,    of   a  new  law, 
or    the  founding  of   a   socialist  colony,  or  the    occurrence 
of  an  abnormal  social  crisis,  may  furnish  the  economist  with 
the  nearest  approach  to  an  experiment  in  the  strict  sense  of 
the  word. 

(2)  Furthermore,  and  for    the    same  reason,  the  econo- 
mist is  obliged  to  study  facts  just  as  they  happen  to  occur, 
without  being  able  to  isolate  any  of  them  from  the  mass  of 
other  connected  facts  with  which  it  is  interwoven. 

Suppose  we  want  to  study  the  effects  of  free  trade.  Sup- 
pose, too,  that  we  could  take  two  countries,  place  them,  as  it 
were,  under  a  bell-jar  during  a  sufficiently  long  period  — 
say  half  a  century  —  and  subject  one  of  them  to  a  regime  of 
absolute  free  trade  and  the  other  to  a  system  of  protection. 
Now,  at  the  end  of  fifty  years,  if  we  should  find  that  the 
first  country  had  grown  wealthy  and  the  second  had  been 
ruined,  would  the  problem  of  free  trade  thereby  be  solved  ? 
By  no  means  !  The  experiment,  to  be  sure,  would  furnish 
valuable  information  ;  but  a  large  number  of  causes  other 
than  the  difference  of  commercial  policy  —  such  as  different 
natural  environment,  racial  differences,  differences  in  the 
prevailing  legal  institutions  or  in  the  energy  of  the  people 


DIFFERENCES   OF   OPINION   CONCERNING  METHOD        17 

—  may  also  explain  the  different  results  of  the  experiment 
in  these  two  countries.1 

The  new  school,  therefore,  in  ridiculing  the  procedure  and 
methods  of  the  deductive  school,  is  too  pretentious  and  not  a 
little  ungrateful.  For,  after  all,  the  new  school  employs  the 
same  categories  of  thought  as  the  old  school.  It  has  not 
remade  economic  science ;  it  has  only  introduced  into  it  a 
new  spirit.  This  is,  to  be  sure,  an  achievement  of  which  it 
may  well  be  proud.  The  historical  school  has  itself  given 
rise  to  much  criticism,  inasmuch  as,  by  dint  of  devoting  its 
attention  to  the  observation  of  facts  and  of  those  variations 
in  economic  phenomena  that  arise  from  time  to  time  and 
from  nation  to  nation,  it  shows  too  strong  a  tendency  to 
fall  into  erudition,  and  to  lose  sight  of  those  permanent  and 
fundamental  causes  which  everywhere  determine  economic 
phenomena.  It  incurs  the  risk  of  remaining  purely  descrip- 
tive. If  we  were  required  to  give  up  the  attempt  to 
discover  permanent  relations  and  general  laws,  working 
themselves  out  under  the  changing  manifestations  of  eco- 
nomic life,  then  we  should  be  compelled  forever  to  renounce 
the  hope  of  building  up  a  science  of  political  economy. 
Howsoever  dangerous  for  the  science  far-reaching  hypoth- 
eses may  be,  they  are  infinitely  less  so  than  the  confession 
that  there  is  no  uniformit}^  underlying  economic  life  in  all 
places  at  all  times.  No  matter  how  justified,  from  certain 
points  of  view,  the  ridicule  may  be  that  has  been  aimed  at 
the  abstract  man  —  the  economic  man  —  of  the  classical 
school,2  we  must  nevertheless  admit  that  there  are  certain 

1  Two  Australian  colonies,  New  South  Wales  and  Victoria,  have  a  com- 
mon origin  and  the  same  natural  environment.     The  first  of  these  is  subject 
to  a  system  of  free  trade,  while  the  second  pursues  a  policy  of  protection. 
Although  this  experiment  has  lasted  a  long  time,  it  cannot  be  said  that  it 
has  solved  the  problem  of  protection  versus  free  trade.     Adhuc  sub  judice  Us 
est. 

2  The  classical  school  regarded  man  from  the  exclusively  economic  point  of 
view  and  assumed  that  his  conduct  is  generally  determined  by  intelligent 
self-interest  or  egoism.    The  adversaries  of  the  school  insist  that  this  assump- 


18  PRINCIPLES    OF   POLITICAL   ECONOMY 

general  characteristics  possessed  by  all  mankind.  The  best 
proof  of  this  may  be  found  in  history  itself,  which  teaches 
that  wherever  human  societies  are  placed  under  analogous 
conditions  the  same  social  types  have  been  evolved.  Feudal- 
ism in  Europe  in  the  twelfth  century,  and  in  Japan  until  the 
nineteenth  century  ;  the  successive  forms  of  property  and 
marriage  ;  the  simultaneous  employment  of  precious  metals 
as  money  ;  identity  of  funeral  rites  ;  and  even  the  uniformity 
of  fairy  tales,  some  of  which,  according  to  modern  folk-lore, 
recur  in  a  more  or  less  identical  form  among  a  large  number 
of  different  peoples  of  the  earth  ;  —  all  these  facts  exemplify 
the  fundamental  identity  of  human  nature  the  world  over. 

Therefore  we  cannot  reject  absolutely  the  abstract  method, 
nor  the  "  let  us  suppose  "  so  dear  to  the  school  of  Ricardo  and 
so  obnoxious  to  the  historical  school,  nor  even  the  fictitious 
stories  (mockingly  called  "  Robinsonades  ")  of  isolated  indi- 
viduals used  to  illustrate  economic  principles.  The  laby- 
rinth of  economic  facts  is  far  too  complex  and  entangled  for 
us  ever  to  be  able  to  see  clearly  through  it  by  the  aid  of  obser- 
vation alone,  and  to  distinguish  those  fundamental  relations 
which  constitute  the  subject-matter  of  every  science.1  To 
bring  light  into  darkness,  and  order  out  of  chaos,  we  must 
make  use  not  only  of  abstraction  but  also  of  imagination, 
i.e.  of  hypothesis.  The  proper  method  of  economic  investi- 
gation proceeds  by  three  stages  :  — 

tion  involves  three  errors  :  (a)  that  man  has  no  other  than  economic  motives 
and  interests  ;  (6)  that  man  knows  always  what  is  best  for  him  ;  and  (c)  that 
he  will  always  do  what  his  intelligent  egoism  dictates.  As  the  critics  of  the 
school  regard  these  three  assumptions  as  false,  they  claim  that  the  economic 
science  built  upon  them  is  necessarily  erroneous.  They  maintain  that  the 
"economic  man,"  whose  sole  preoccupation  is  the  accumulation  of  wealth, 
whose  exclusive  motive  is  economic  egoism,  and  who  knows  what  that  egoism 
dictates,  is  an  unreal  fabric  of  the  economist's  brain. 

1  Chevreuil  declared  that  "  every  fact  is  an  abstraction."  Although  this 
dictum  seems  a  strange  one  at  the  first  glance,  yet  it  is  easily  understood  if 
we  but  consider  that  what  we  call  a  fact  is  previously  something  which  has 
had  to  be  separated  out  of  a  host  of  other  connected  facts,  and  for  the  ob- 
servation of  which  abstraction  has  had  to  be  made  of  many  other  things. 


DIFFERENCES   OF   OPINION   CONCERNING    METHOD       19 

(1)  Observing  facts,  without  any  preconceived  notion, — 
especially  those  facts  that  at  first  seem  most  insignificant. 

(2)  Imagining  a  general  explanation  which  will  enable  us 
to  establish  between  two  groups  of  facts  the  connecting  link 
of  cause   and  effect ;    in   other   words,   by  formulating   an 
hypothesis. 

(3)  Verifying  this  hypothesis  by  determining,  with   the 
help  of  experiment,  if  possible,  or,  at  any  rate,  by  means  of 
specially  conducted  observations,  whether  or  not  the  applied 
hypothesis  exactly  fits  the  facts  it  proposes  to  explain  and 
connect. 

The  above,  moreover,  is  the  procedure  employed  even  in 
the  physical  and  natural  sciences.  All  the  great  laws  which 
form  the  basis  of  modern  science,  from  Newton's  law  of 
gravitation  down  through  the  list,  are  only  verified  hypoth- 
eses. We  may  go  further  than  this,  and  declare  that  the 
great  theories  which  have  served  as  a  basis  for  the  scientific 
discoveries  of  modern  times  (e.g.  the  existence  of  ether,  in 
the  physical  sciences,  and  the  doctrine  of  evolution,  in  the 
natural  sciences)  are  only  hypotheses  not  yet  verified.1 

The  mistake  of  the  classical  school,  therefore,  did  not  con- 
sist in  too  frequent  use  of  the  abstract  method,  but  in  having 
too  often  mistaken  the  abstraction  for  the  reality.  For 
example  :  After  having  invented  its  "economic  man," 
prompted  solely  by  egoism  (which  it  had  a  perfect  right  to 
do),  its  error  lay  in  believing  in  the  real  existence  of  such  a 
being,  and  in  his  existence  alone  in  the  economic  world.  It 

*As  Stanley  Jevons  has  observed  in  his  "Principles  of  Science,"  the 
method  employed  for  the  discovery  of  truth  in  the  sciences  is  similar  to 
that  unconsciously  used  by  those  who  try  to  find  the  meaning  of  rebuses  or 
ciphers  on  the  back  pages  of  some  illustrated  papers.  In  order  to  guess  what 
their  meaning  may  be,  we  imagine  some  meaning  or  other.  Then  we  observe 
whether  this  really  agrees  with  the  figures  or  pictures  before  us  ;  if  it  does 
not,  it  is  an  hypothesis  to  be  rejected.  We  then  conceive  another  one,  and 
so  forth,  until  we  obtain  a  more  successful  result,  or  lose  courage  altogether. 
"We  shall  find  nothing  in  facts  unless  we  have  previously  in  our  minds  an 
image  or  a  forecast  of  the  truth  underlying  them. 


20  PRINCIPLES   OF   POLITICAL   ECONOMY 

beheld  in  these  abstractions  the  very  foundations  of  the  eco- 
nomic edifice,  whereas  they  represent  merely  the  scaffolding 
necessary  for  the  construction  of  the  building  but  erected 
only  to  be  done  away  with  when  once  the  work  is  finished. 
It  is  not  the  deductive  method,  but  the  dogmatic  spirit,  that 
we  must  be  careful  to  avoid.  Hence  the  deductive  method 
has  not  been  abandoned.  On  the  contrary,  it  has  recently 
been  revived,  in  a  more  absolute  form  than  ever,  by  two  new 
schools  of  economic  thought. 

The  first  of  these  is  the  so-called  mathematical  school.1 
This  school  considers  the  relations  which  arise  among  men 
in  any  given  circumstances  as  relations  of  equilibrium,  like 
those  which  are  studied  in  mathematical  mechanics  ;  and,  as 
in  mechanics,  this  school  regards  the  social  economic  forces 
as  susceptible  of  being  expressed  by  algebraic  formulae.  To 
accomplish  this,  a  problem  must  be  reduced  to  a  certain  lim- 
ited number  of  factors,  excluding  all  others,  just  as  in  mathe- 
matical mechanics. 

The  second,  or  psychological  school,  also  called  the  Austrian 
school,  because  of  the  nationality  of  its  most  eminent  repre- 
sentatives,2 devotes  its  attention  almost  exclusively  to  the 
theory  of  value,  which  it  regards  as  the  foundation  of  all 
economic  science.  And  as  value  is,  according  to  this  school, 
only  the  expression  of  human  desires,  economic  science  is 
reduced  to  a  study  of  human  desires  and  the  causes  which 

1  This  school,  it  is  commonly  supposed,  was  begun  in  France  by  Cournot, 
the  author  of  "Recherches  sur  les  Principes  Mathe'matiques  de  la  The'orie 
des  Richesses,"  published  in  1838.    This  book,  of  which  an  English  transla- 
tion was  made  by  N;  T.  Bacon,  in  the  "Economic  Classics"   (Macmillan, 
New  York,  1897),  had  no  success  whatever  until  the  subsequent  reintroduc- 
tion  of  mathematical  methods  in  economic  science  by  Jevons,  Marshall,  and 
Edgeworth  in  England,  by  Walras  in  Switzerland,  Pantaleoni  in  Italy,  Gos- 
sen  and  Launhardt  in  Germany,  and  Irving  Fisher  in  the  United  States. 

2  Professors  Karl  Menger,  von  Boehm-Bawerk,  and  Wieser.    The  doctrines 
of  this  school,  which  are  rapidly  gaining  ground  everywhere,  may  be  found 
summarized  in  Professor  William  Smart's  "  Introduction  to  the  Theory  of 
Value."     The  most  prominent  American  protagonists  of  the  school  are  Pro- 
fessors  J.  B.  Clark  and  S.  N.  Patten. 


DIFFERENCES   OF   OPINION   CONCERNING   METHOD        21 

intensify  or  diminish  them ;  the  result  is  a  very  subtle 
psychological  analysis.  Besides,  was  not  the  old  classical 
principle  (called  hedonistic,  from  a  Greek  word  signifying 
pleasure  or  enjoyment),  which  consists  in  seeking  a  maximum 
of  gratification  at  a  minimum  cost  of  effort,  an  entirely  psy- 
chological principle  ? 

It  is  evident  that  these  two  schools  carry  the  deductive 
method  to  its  extreme  logical  consequences.  Nevertheless, 
we  must  concede  that  they  have  not  committed  the  error, 
into  which  the  old  deductive  school  had  fallen,  of  being  led 
astray  by  their  own  speculations.  They  do  not  regard  the 
hedonistic  principle,  or  their  abstractions,  as  anything  more 
than  hypotheses  necessary  for  the  establishment  of  a  science 
in  the  strict  sense  of  the  term.1 

While  the  abstract  and  hypothetical  method  is  thus 
revived  by  the  modern  mathematical  school,  Say's  natural- 
istic method  may  also  be  said  to  live  again  in  the  biologico- 
sociological  school,  which  considers  political  economy  as  a 
kind  of  annex  to  natural  history  and  biology  ;  and  which, 
regarding  human  societies  more  or  less  as  organisms,  trans- 
poses physiological  laws  to  the  domain  of  sociology.2 

But  this  school,  which  for  a  time  prospered,  has  lost  much 
of  its  influence.  Many  sociologists  protest  against  the  com- 

1  In  his  "Elements  d'Economie  Politique  pure,"  M.  Walras  of  Lausanne 
writes,  "Pure  political  economy  is  essentially  the  theory  of  the  determina- 
tion of  prices  under  a  hypothetical  regulation  of  absolutely  free  competition." 
Fantaleoni,  in  his  "  Principii  di  Economia  pura,"  even  declares,  "Whether 
the  hedonistic  and  psychological  hypothesis  (that  of  the  maximum  of  pleas- 
ure with  the  minimum  of  effort)  whence  all  economic  truths  are  deduced, 
coincides  or  fails  to  coincide  with  the  motives  which  actually  determine 
men's  actions,  is  a  question  which  in  no  wise  detracts  from  the  accuracy  of 
truths  deduced  therefrom." 

2  This  point  of  view  is  represented  principally  by  Schaeffle,  "  Bau  und 
Leben  des  socialen  Koerpers";    Lilienfeld,  "La  Pathologie  sociale  "  ;  Rene" 
Worms,  "  Organisme  et  Socie'te'."     These  authors  emphasize  the  following 
ideas  :  — 

Every  organic  body  is  composed  of  innumerable  cells,  each  having  its  own 
life  and  individuality,  so  that  every  living  being  is  really  only  an  association 
of  millions  and  billions  (more  numerous,  therefore,  than  the  largest  human 


22  PRINCIPLES    OF   POLITICAL    ECONOMY 

parison  of  society  to  an  organism.  Herbert  Spencer  him- 
self, who  most  brilliantly  developed  these  analogies  in  his 
"  Principles  of  Sociology,"  has  protested  against  the  attempt 
to  treat  living  organisms  and  human  societies  as  similar.1 

V.    The  Various  Economic  Schools  of  Thought 

Regarding  both  the  right  method  of  study,  and  the  solu- 
tions proposed  for  economic  problems,  there  is  a  divergence 
of  opinion  among  economists  almost  as  great  as  among  phi- 
losophers. This  is  incontestably  a  sign  of  inferiority.  There 
is  little  consolation  in  the  fact  that  political  economy  is 

societies)  of  individuals  which,  as  Claude  Bernard  said,  "  are  united  but  yet 
remain  distinct,  like  men  holding  one  another  by  the  hand." 

Each  organized  being  is  subject  to  the  law  of  the  physiological  division 
of  labor.  In  very  low  organisms  all  the  functions  are  merged  together  in  a 
shapeless  and  homogeneous  mass  ;  but  as  organization  is  perfected,  the 
various  functions  of  nutrition,  reproduction,  locomotion,  etc.,  become  differ- 
entiated, and  each  comes  to  possess  a  special  organ.  In  fact,  it  may  be  said 
that  the  more  divided  the  physiological  labor  is,  the  higher  is  the  rank  of  the 
organism. 

Each  living  being  is  the  seat  of  a  perpetual  movement  of  exchange  and 
circulation,  an  exchange  of  services  and  even  of  materials;  for  it  is  impos- 
sible for  a  function  of  the  organism  to  become  specialized  in  one  single  organ, 
as  we  have  just  seen,  unless  the  other  parts  also  fulfil  other  functions  which 
are  essential  to  life,  and  communicate  the  ensuing  benefits.  Herbert  Spencer 
remarks  that  "the  entire  class  of  men  engaged  in  buying  and  selling  com- 
modities of  all  kinds,  on  large  and  small  scales,  and  in  sending  them  along 
gradually  formed  channels  to  all  districts,  towns,  and  individuals,  —  is  along 
with  these  channels  fulfilling  an  office  essentially  like  that  fulfilled  in  .a  living 
body  by  the  vascular  system." 

Credit  itself  is  as  indispensable  for  the  due  working  of  living  beings  as  it 
is  for  that  of  social  organisms.  For,  as  Herbert  Spencer  says,  "If  an  organ 
in  the  individual  body  or  in  the  body  politic  [is]  suddenly  called  into  great 
action  —  that  it  may  continue  responding  to  the  increased  demand,  there 
must  be  an  extra  influx  of  the  materials  used  in  its  actions  ;  it  must  have 
•  credit  in  advance  of  function  discharged." 

1  Another  eminent  sociologist,  Tarde,  has  still  more  energetically  broken 
away  from  this  tendency  by  declaring  that  "the  science  of  sociology  will 
only  begin  to  develop  when  it  has  cut  the  umbilical  cord  which  unites  it  to 
its  mother,  biology."  But  even  this  is  too  great  a  concession,  for  we  do  not 
at  all  regard  biology  as  the  mother  of  sociology. 


THE    LIBERAL   SCHOOL  23 

scarcely  more  than  a  century  old,  and  in  the  hope  that  these 
disagreements  will  disappear  in  time.  Other  sciences  which 
are  no  older,  and  some  of  which  a  generation  ago  were  almost 
unknown,  have  already  found  it  possible  to  establish  a  group 
of  principles  sufficiently  well-founded  to  obtain  the  almost 
unanimous  acceptance  of  those  interested  in  these  sciences. 
We  might  be  justified  in  hoping  for  the  same  agreement 
sooner  or  later  among  economists,  if  the  disagreement  con- 
cerned only  the  observation  of  phenomena  and  the  ex- 
planation of  their  interrelations.  But  unfortunately  this 
divergence  of  ideas  concerns  the  very  purpose  and  aim  to 
be  accomplished,  the  ideal  to  be  worked  for,  and  the  means 
suitable  for  its  realization.  It  cannot  cease,  therefore,  until 
the  moral,  political,  and  social  unanimity  of  mankind  is  a 
realized  fact. 

In  contemporaneous  economic  thought,  we  may  point  out 
five  schools  or  tendencies  that  are  clearly  distinguishable. 

SECTION  1.     THE  LIBERAL  SCHOOL 

The  first  of  these  schools  is  called  liberal,  because  of  the 
celebrated  formula  which  for  a  long  time  served  as  its  motto  : 
"  laisser  faire,  laisser  passer."  l  But  is  it  really  a  "  school "  ? 

To  this  insinuation  its  partisans  object  with  some  loftiness, 
and  maintain  that  they  represent  the  science  itself.  They 
assume,  and  for  the  most  part  receive  even  from  their 
opponents,  the  simple  name  of  "economists."  The  begin- 
nings of  this  school  coincide  as  a  matter  of  fact  with  the 
'origin  of  economic  science  itself.  The  doctrines  of  the 
school  are  very  simple,  and  may  be  summed  up  in  three 
points  :  — 

1  Its  adversaries  sometimes  call  it,  ironically,  the  "orthodox"  school. 
In  its  origin  it  is  directly  descended  from  the  physiocrats  (one  of  whose 
predecessors,  Gournay,  is  said  to  have  originated  the  maxim  "laisser  faire, 
laisser  passer  ")  and  J.  B.  Say.  Its  principal  representatives  in  the  nineteenth 
century  have  been  Dunoyer,  Bastiat,  Baudrillart,  Courcelle-Seneuil,  and 
L6on  Say,  in  France;  Ferrara,  in  Italy;  Francis  Walker,  in  the  United 
States. 


24  PRINCIPLES    OF   POLITICAL    ECONOMY 

(1)  Human  societies  are  governed  by  natural  laws  which 
we  could  not  alter,  even  if  we  wished,  since  they  are  not  of  our 
own   making.     Moreover,   we    have  not  the  least  interest   in 
modifying  them,  even  if  we  could ;  for  they  are  good,  or,  at 
any  rate,  the  best  possible.1     The  part  of  the  economist  is 
confined  to  discovering  the  action   of   these    natural   laws, 
while  the  duty  of  individuals  and  of  governments  is  to  strive 
to  regulate  their  conduct  by  them. 

(2)  These  laws  are  in  no  wise  opposed  to  human  liberty; 
on  the  contrary,  they  are  the  expression  of  relations  which 
arise  spontaneously  among  men  living  in  society,  wherever 
these  men  are  left  to  themselves  and  are  free  to  act  accord- 
ing to  their  own  interests.     When  this  is  the  case,  a  harmony 
is  established  among  these  individual  interests  which  are 
apparently    antagonistic  ;    this    harmony   is    precisely    the 
natural  order  of  things,  and  is  far  superior  to  any  artificial 
arrangement  that  could  be  devised. 

(3)  The  part  of  the  legislator,  if  he  wishes  to  insure  social 
order  and  progress,  must  therefore  be  limited  to  developing 
individual  initiative  as  fully  as  possible,  to  removing  what- 
ever might  interfere  with  such  development,  and  to  prevent- 
ing individuals  from  meddling  with  one  another.     Therefore 

The  English  economists  who  succeeded  the  great  founders  of  the  science 
have  been  ironically  designated  as  the  Manchester  school,  consisting  of  such 
authors  as  MacCulloch,  Senior,  Cairnes  ;  they  may  be  considered  as  belong- 
ing to  the  liberal  school,  except  that  they  are  not  quite  so  optimistic  as  the 
French  liberals,  but  even  more  dogmatic  than  they.  John  Stuart  Mill's  fine 
book  on  the  "Principles  of  Political  Economy,"  first  published  in  1848,  is 
the  first  to  manifest  any  leaning  toward  socialism. 

Most  French  economists  have  remained  faithful  to  the  classical  or  liberal 
school.  M.  de  Molinari  is  its  most  ardent  disciple,  and  M.  Paul  Leroy- 
Beaulieu  is  probably  its  most  eminent  representative  in  France  to-day,  where 
the  monthly  "Journal  des  Economistes"  defends  the  tenets  of  liberalism, 
while  the  "  Revue  d'Economie  politique,"  edited  by  Professors  Paul  Cauwes 
and  Charles  Gide,  inclines  to  the  historical  school. 

1  "  The  laws  which  govern  capital,  wages,  and  the  distribution  of  wealth 
are  as  good  as  they  are  inevitable.  They  bring  about  the  gradual  elevation 
of  the  level  of  humanity." — LEROY-BEAULIEU,  "Precis  d'Economie 
politique." 


THE   LIBERAL   SCHOOL  25 

the  intervention  of  governments  ought  to  be  reduced  to  that 
minimum  which  is  indispensable  to  the  security  of  each  and 
of  all,  —  in  a  word,  to  the  policy  of  "  let  alone."  l 

This  conception  certainly  lacks  neither  simplicity  nor 
grandeur.  Whatever  may  become  of  it  in  the  'future,  it 
possesses  at  least  the  merit  of  having  helped  to  establish  the 
science  of  political  economy  ;  and  if  other  doctrines  are 
bound  permanently  to  take  its  place,  it  will,  nevertheless, 
remain  the  foundation  on  which  new  theories  are  built. 

The  most  serious  complaint  that  can  be  made  against  this 
body  of  teaching  is  its  marked  tendency  to  optimism,  which 
appears  to  be  inspired  far  less  by  a  truly  scientific  -spirit 
than  by  a  desire  to  justify  the  existing  order  of  things. 
Undoubtedly,  from  a  consideration  of  the  economic  organ- 
ization of  a  society  and  of  the  institutions  which  are  its 
groundwork,  the  conclusion  may  be  drawn  that  they  are 
beneficial,  at  any  rate  in  certain  aspects  ;  for  the  very  fact 
of  their  existence  and  duration  shows  well  enough  that  they 
have  a  value  which  is  at  least  relative  ;  further,  that  they 
are  natural  is  a  just  conclusion  to  draw,  for  they  are  evi- 
dently determined  by  the  series  of  previous  states  which 
produced  them.  But  in  no  wise  can  it  be  inferred  that 
they  are  the  best  possible  ;  such  a  conclusion  is  altogether 
illogical.2 

1  "  "We  assert  that  these  natural  laws  govern  the  production  and  distribu- 
tion of  wealth  in  the  manner  that  is  most  useful,  i.e.  most  conformable  to  the 
general  good  of  the  human  species.     Observation  of  these  laws,  together  with 
the  smoothing  away  of  natural  obstacles  which  impede  their  action,  and 
especially  the  prevention  of  any  artificial  obstacles,  is  sufficient  to  render  the 
condition  of  man  as  good  as  is  consistent  with  his  acquirements  and  his  industry. 
Our  gospel,   therefore,  is  summed  up  in  these  four  words,  « Laisser  faire, 
laisser  passer.'  "  — DE  MOLINARI,  "  Leslois  naturelles." 

Bastiat's  famous  work,  the  "Harmonies  e"conomiques,"  is  nothing  but  the 
development  of  similar  ideas. 

2  Auguste  Comte  protested  in  the  name  of  science  against  "the  systematic 
tendency  to   optimism,  which  is  clearly  theological  in   origin  "   (Cours  de 
Philosophic  Positive,  48th  lesson).     But  this  doctrine  cannot  offer  even  the 
excuse  that  it  agrees  with  theology,  as  Comte  supposes  ;  for  Christian  theol- 
ogy is  nothing  less  than  optimistic.     On  the  contrary,  in  its  eyes  the  actual 


26  PRINCIPLES    OF   POLITICAL    ECONOMY 

The  idea  that  the  prevailing  economic  order  is  the  sponta- 
neous product  of  liberty,  and  that  it  could  be  replaced  only 
by  an  order  founded  on  constraint  and  therefore  worse  than 
the  present  one,  is  not  well-founded.  The  present  order  of 
things  is,  at  least  in  part,  the  result  either  of  war  and  brutal 
conquest  (e.g.  the  appropriation  of  the  soil  of  England  and 
Ireland  by  a  small  number  of  landlords,  originating  histori- 
cally in  conquest,  usurpation,  or  confiscation),  or  of  legisla- 
tive enactments  passed  by  certain  classes  of  society  in  their 
own  interest  (e.g.  laws  of  inheritance,  fiscal  laws,  etc.). 
Therefore,  if  the  world  were  to  be  made  over  again,  and  if 
it  could  be  rearranged  under  conditions  of  absolute  liberty, 
there  is  no  proof  that  it  would  be  at  all  like  the  world  of 
to-day. 

Nor  is  it  any  more  legitimate  to  conclude  that  because 
natural  laws  are  permanent  and  immutable,  existing  eco- 
nomic facts  and  institutions  should  also  possess  this  char- 
acter of  permanence  and  immutability.  That,  too,  is  a 
sophism,  not  to  say  word-jugglery.  If,  on  the  other  hand, 
as  contemporary  science  shows  a  tendency 'to  believe,  the 
natural  law  par  excellence  is  that  of  evolution,  then  it  must 
be  conceded  that  natural  laws,  far  from  excluding  the  idea 
of  change,  always  presuppose  it.  When  it  is  maintained, 
for  example,  that  the  wage-system  is  bound  to  disappear, 
because,  just  as  it  has  succeeded  serfdom  and  slavery,  so  it 
too  will  be  replaced  in  turn  by  cooperation  or  some  other 
system  not  now  nainable,  we  may,  of  course,  criticise  this 
line  of  argument  ;  but  we  cannot  maintain  that  it  is  con- 
tradictory to  natural  laws,  for  these  very  laws  cause  the 
same  plant  to  produce,  successively,  first  seed,  then  flower, 
then  fruit. 

Not  only  do  economic  facts  and  institutions  change,  but 
our  will  is  by  no  means  powerless  to  bring  about  these  changes. 
Indeed  human  will  is  every  day,  and  in  the  most  efficacious 

order  of  things  and  all  the  manifestations  of  human  liberty  are  irretrievably 
vitiated  by  the  Fall. 


THE   LIBERAL   SCHOOL  27 

manner,  exercised  on  physical  facts  for  their  modification 
according  to  our  needs.  This  reasoned  human  influence  on 
natural  phenomena  is  not  in  the  slightest  incompatible  with 
the  idea  of  natural  law.  On  the  contrary,  it  is  closely  bound 
up  with  it.1 

We  need  only  open  our  eyes  to  perceive  man's  marvellous 
power  to  modify  natural  phenomena.  Undoubtedly  there 
are  some  things,  which,  by  reason  of  their  magnitude  or 
their  remoteness,  escape  all  human  influence.  Such,  for 
example,  are  astronomical,  or  geological,  or  even  meteorolog- 
ical phenomena  ;  we  must  submit  to  them  in  silence  ;  our 
faculty  of  prevision  cannot  enable  us  to  avoid  the  approach 
of  a  comet  or  the  shock  of  an  earthquake.  But  how  many 
other  domains  there  are  in  which  our  science  is  almost  su- 
preme J  Most  of  the  compounds  of  inorganic  chemistry 
(including  the  most  important  ones)  have  been  produced 
by  the  scientist  in  his  laboratory.  When  we  watch  the 
cattle-raiser  in  his  stalls,  the  horticulturist  in  his  gardens, 
ceaselessly  modifying  animal  or  vegetable  forms  and  creat- 
ing new  varieties,  it  seems  as  if  animate  Nature  herself  sub- 
mitted to  the  process  of  alteration  at  our  pleasure.  Even 
atmospheric  phenomena  do  not  entirely  escape  the  power  of 
human  industry,  which  makes  bold  to  assert  that  by  clear- 
ances or  by  new  plantations,  it  can  modify  the  weather, 
and,  repeating  the  miracle  of  the  prophet  Elisha,  bring  down 
rain  and  dew  from  heaven  whenever  it  wishes. 

How  much  truer  it  is,  therefore,  that  our  influence  may  be 
exerted  on  economic  facts,  precisely  because  they  are  acts 
performed  by  man,  and  because  we  have  immediate  control 
over  them  !  2  Without  doubt,  here,  as  in  the  domain  of  physi- 

1  As  M.  Espinas  wittily  remarks  in  his  book  on  "  Les  Soci6te"s  animates," 
"If  human  activity  were  unable  to  change  the  order  of  things,  the  act  of 
boiling  an  egg  would  have  to  be  regarded  as  a  miracle." 

2  Even  the  representatives  of  the  determinist  school,  those  who  go  so  far 
as  to  deny  free  will  (and  surely  the  "  liberals  "  cannot  be  among  them), 
recognize  that  man  has  the  power  of  modifying  the  order  of  things  in  which 
he  lives.     They  make  only  the  reservation  that  every  modifying  act  of  man 


28  PRINCIPLES    OF    POLITICAL    ECONOMY 

cal  phenomena,  our  influence  is  confined  within  certain 
limits  that  science  seeks  to  determine,  and  which  all  men, 
whether  acting  individually  by  means  of  private  enterprise, 
or  acting  collectively  under  legislative  regulation,  should 
strive  to  keep  in  mind.  In  this  connection  we  may  appro- 
priately be  reminded  of  Bacon's  old  adage  to  the  effect  that 
facts  can  only  be  modified  on  condition  that  we  recognize 
the  natural  laws  which  govern  them,  and  conform  to  these 
laws  :  naturoe  non  imperatur  nisi  parendo.  Alchemy  strove 
to  turn  lead  into  gold  ;  chemistry  has  abandoned  that  use- 
less quest,  having  found  that  these  two  bodies  are  simple 
elements,  or  at  least  irreducible  ones;  but  it  has  not  re- 
nounced the  attempt  to  convert  charcoal  into  diamond,  for 
in  this  case  it  has  established  the  presence  of  one  single 
body  in  two  different  states.  The  Utopian  uselessly  tortures 
nature  to  obtain  what  it  is  powerless  to  give  ;  but  the  man 
of  science  seeks  only  what  he  knows  to  be  possible.  The 
sphere  of  this  "possible"  is  infinitely  more  vast  than  the 
classical  school  imagines. 

SECTION  2.     THE  SOCIALIST  SCHOOL 

The  socialist  school  is  as  old  as  the  classical  school ;  older, 
we  may  even  say,  for  there  were  socialists  long  before  there 
was  any  science  of  political  economy.  It  was,  however,  only 
after  economics  had  taken  a  scientific  character  that  social- 
ism, by  antagonizing  the  newly  established  science,  was  firot 
clearly  formulated.  As  the  doctrines  of  this  school  are 
especially  of  a  critical  nature,  and  show  considerable  diverg- 
ency, they  are  much  harder  to  formulate  than  those  of  the 
preceding  school.1  Yet  they  may  be  summed  up  as  follows  :— 

All  sects  of  socialists  believe  that  the  organization  of 
modern  societies  is  tainted  by  certain  deep-seated  defects, 

is  itself  predetermined  by  certain  causes.  This  is,  however,  a  problem  of 
metaphysics  not  to  be  discussed  here. 

1  Socialism,  if  we  leave  out  of  consideration  a  long  line  of  precursors 
extending  as  far  back  as  Plato,  is  represented  in  the  nineteenth  century 


THE   SOCIALIST   SCHOOL  29 

and  that  the  present  social  organization  is  therefore  bound  to 
disappear  sooner  or  later.  In  their  opinion,  this  organization 
is  not  in  the  least  a  natural  product  of  liberty,  but  the  result 
of  many  acts  of  injustice  and  spoliation  which  have  been 
hallowed  by  written  laws.  They  maintain  that  the  source 
of  these  evils  lies  in  free  competition  and  in  individual  or  pri- 
vate property.  They  seek  to  prove  that  these  two  institutions 
tend  to  sacrifice  the  general  interest  to  private  interest,  and 
constantly  to  increase  the  wealth  of  a  small  number  of  per- 
sons while  multiplying  the  number  of  those  that  are  poor,  — 
thus  realizing  more  and  more  the  old  motto  :  paucis  humanum 
genus  vivit. 

principally  by  Saint-Simon,  Fourier,  and  Proudhon,  in  France  ;  by  Owen, 
"William  Morris,  and  the  Fabian  Society,  in  England;  by  Karl  Marx,  Las- 
salle,  Rodbertus,  and  Friedrich  Engels,  in  Germany ;  by  Colins,  de  Paepe, 
and  Vandervelde,  in  Belgium.  Socialism,  in  the  United  States,  aside  from 
numerous  small  religious  communities  organized  on  a  socialistic  basis,  is 
almost  entirely  of  foreign  importation  ;  although  Edward  Bellamy's  romance 
"Looking  Backward"  has  probably  been  the  most  widely  read  socialist 
Utopia  of  modern  times. 

French  authors  have  contributed  most  to  the  older  Utopian  socialism  ;  but 
the  Germans  have  given  modern  socialism,  called  collectivism,  its  distinctive 
physiognomy.  The  theory  called  anarchism  is  due  principally  to  Proudhon 
and  the  Russians  Bakunin  and  Kropotkin.  It  has  been  widely  propagated 
only  among  the  Latin  races,  i.e.  in  France,  Spain,  and  Italy.  Russian  nihil- 
ism, generally  confounded  with  anarchism,  has  nothing  to  do  with  it. 

From  the  very  extensive  bibliography  of  socialism  and  anarchism  we 
refer  the  student  to  the  following  books  :  — 

Bae,  "Contemporary  Socialism."  Kirkup,  "History  of  Socialism." 
Graham,  "Socialism  Old  and  New."  Zenker,  "History  of  Anarchism." 
Laveleye,  "  Socialism  of  To-day."  Schaeffle,  "Quintessence  of  Socialism." 
Dawson,  "  German  Socialism  and  Ferdinand  Lassalle  "  and  "  Bismarck  and 
State  Socialism."  R.  T.  Ely,  "  Labor  Movement  in  America."  Winterer, 
"Le  Socialisme  Contemporain."  Bourdeau,  "  L'Evdlution  du  Socialisme." 
Kautsky,  "Karl  Marx'  Oekonomische  Lehren."  Flint,  "  Socialism."  "Die 
Geschichte  des  Socialismus  in  Einzeldarstellungen,"  published  by  Dietz  at 
Stuttgart,  and  written  by  a  number  of  well-known  socialists  in  several  volumes. 
"Fabian  Essays  on  Socialism."  Janet,  "Les  Origines  du  Socialisme  Con- 
temporain." Metin,  "  Le  Socialisme  en  Angleterre."  Von  Waltershausen, 
"DerModerne  Socialismus  in  den  Vereinigten  Staaten."  Webb,  "Social- 
ism in  England." 


30  PRINCIPLES   OF   POLITICAL  ECONOMY 

They  therefore  prophesy  a  new  order  of  things  in  which 
private  property,  if  not  completely  abolished,  will  at  any 
rate  be  continually  reduced.  According  to  the  extent  of  their 
demands  in  this  direction,  they  may  be  classified  thus  :  — 
those  who  favor  the  entire  suppression  of  private  property  in 
all  kinds  of  wealth  are  called  communists;  those  who  favor 
the  suppression  of  property  in  the  instruments  of  production 
are  called  collectivists ;  those  who  favor  the  suppression  of 
property  in  land  and  buildings  are  called  nationalists. 

As  for  the  details  of  the  future  society  there  is  much  dis- 
agreement and  doubt.  The  old  socialists  (Sir  Thomas  More, 
Saint-Simon,  and  Fourier),  who  are  sometimes  disdainfully 
called  "  Utopian  "  and  whose  doctrines  are  nowadays  some- 
what —  perhaps  too  much  —  discredited,  attempted  to  build 
up  a  complete  social  structure  based  on  an  a  priori  concep- 
tion of  justice.  The  others,  who  proudly  assume  the  title  of 
scientific  socialists  (Karl  Marx,  Lassalle,  Friedrich  Engels) 
assert  that  this  future  society  will  issue  forth  from  the  pres- 
ent society  like  a  butterfly  from  its  chrysalis.  They  refuse 
to  describe  its  features.  The  most  interesting  and  original 
part  of  their  thesis  consists  in  the  attempt  to  prove  that  the 
society  of  the  future  is  already  contained,  in  an  embryonic 
state,  in  the  womb  of  our  modern  societies,  which  are  nearly 
ready  for  its  birth.1  They  point  out  certain  features  of 
present  society,  which,  in  their  opinion,  are  the  prelimi- 
nary symptoms  of  a  socialistic  state  :  production  on  a  large 
scale,  trusts,  machine  industry,  the  development  of  public 
services,  etc. 

The  classical  school  maintains  that  the  socialists  deny 
the  existence  of  natural  laws.  This  is  by  no  means  true, 
for  the  "  scientific  socialists  "  are  ultra-deterministic.  The 
liberal  school  j,n  its  use  of  the  term  "  natural  law  "  implies 

1  So  far  as  any  attempts  have  been  made  to  outline  the  collectivist  society 
of  the  future,  a  description  may  be  found  in  Schaeffle's  "  Quintessence  of 
Socialism,"  Gronlund's  "Cooperative  Commonwealth,"  and  G.  Renard's 
"  Le  R6gime  Socialiste."  See  also  the  "  Fabian  Essays  "  (London). 


THE  SOCIALIST   SCHOOL  31 

the  idea  of  stability  and  immutability,  but  the  contem- 
poraneous school  of  socialists  employs  the  same  term  as  im- 
plying the  idea  of  change  and  of  ceaseless  transformation. 
They  do  not  agree  with  Bastiat  in  regarding  human  societies 
as  turning  round  a  fixed  point  in  an  eternal  and  changeless 
equilibrium.  They  consider  society  to  be  like  a  plant  or  an 
animal,  which  from  birth  to  death  undergoes  constant  trans- 
formation. We  must  admit  that  the  latter  point  of  view  is 
in  better  harmony  with  contemporary  science.  Besides, 
most  socialists  expect  a  revolution,  and  regard  it  as  indis- 
pensable for  the  substitution  of  the  new  social  order  for  the 
old.  Coming  from  evolutionists,  this  opinion  may  at  first 
appear  surprising  ;  they  seek  to  justify  it,  however,  by  call- 
ing attention  to  the  fact  that  the  process  of  evolution  often 
involves  a  crisis,  i.e.  the  sudden  and  perhaps  violent  passage 
from  one  state  to  another.  As  illustrations  of  this  they  men- 
tion the  chrysalis,  which,  before  becoming  a  butterfly,  must 
tear  away  its  cocoon ;  or  the  chicken,  which,  to  leave  the 
egg,  must  break  the  shell  with  its  beak. 

All  these  schools  (save  one  alone,  the  anarchist  school, 
which,  on  the  contrary,  is  violently  individualist)  are  natu- 
rally disposed  to  extend  as  far  as  possible  the  functions  of  the 
government,  since  their  aim  is  to  transform  into  public 
agencies  all  that  which  to-day  springs  from  private  enter- 
prise.1 

It  is  impossible  in  this  chapter  to  estimate  the  value  of  the 
criticisms  directed  by  socialists  against  the  present  social 

1  It  is  only,  however,  as  a  transitional  step  that  socialism  asks  for  the  ex- 
tension of  the  functions  of  the  government.  For  it  professes  the  greatest 
contempt  for  the  State  as  it  is  to-day,  — the  bourgeois  State,  as  it  terms  it,  — 
which  looks  after  its  interests  and  carries  on  its  enterprises  by  the  same 
methods  as  individuals.  In  its  plans  for  reorganizing  society,  this  school 
avoids  the  word  "state,"  and  prefers  to  use  the  term  "  society."  The  State, 
in  the  socialist  plan,  is  to  lose  all  political  character,  and  to  become  purely 
economic  ;  it  is  to  become  something  analogous  to  the  administrative  council 
of  a  huge  cooperative  society  embracing  the  entire  country.  It  is  in  this 
respect  that  true  socialism,  —  proletarian  socialism,  called  "social  democ- 
racy" in  Germany  —  differs  from  state  socialism. 


32  PRINCIPLES   OF   POLITICAL   ECONOMY 

order  ;  we  shall  hereafter  refer  to  them  repeatedly.  Suffice 
it  to  say  here,  in  explanation  of  the  rapid  growth  of  socialism, 
that  these  criticisms  contain  a  large  share  of  truth,  and  have, 
taken  all  in  all,  exerted  a  salutary  influence  on  the  thought 
and  tendency  of  the  century. 

But  as  a  positive  doctrine,  i.e.  as  proposing  a  new  system 
to  be  substituted  for  that  under  which  we  live,  socialism 
remains  conjectural.  The  ideal  future  state  announced  as 
coming  seems  to  be  neither  realizable  nor,  from  many  points 
of  view,  even  very  desirable.  All  the  proposed  systems, 
after  having  won  over  a  few  enthusiastic  disciples,  have  been 
abandoned  or  continue  to  exist  only  as  vague  hopes  ;  and  as 
for  the  programme  of  so-called  scientific  socialism,  many  of 
its  disciples  are  beginning  to  doubt  that  it  has  pointed  out 
the  true  course  of  economic  evolution.  (This  subject  will  be 
discussed  under  the  title  "  Collectivism  "  in  Book  V.) 

SECTION  3.     STATE  SOCIALISM 

This  doctrine  should  by  no  means  be  confounded  with  the 
preceding  one.  It  represents,  on  the  contrary,  an  antidote 
for  social  democracy,  and  is  generally  as  popular  with  es- 
tablished governments  as  the  other  is  with  the  revolutionary 
parties  that  seek  to  overthrow  them. 

It  is  closely  connected  in  its  origins  with  the  historical 
school,  of  which  we  have  spoken  in  the  preceding  division. 
The  historical  school  was  first  distinguished  from  the  classical 
school  only  in  point  of  method  ;  but  it  soon  came  to  differ  from 
it  in  its  tendencies  and  its  practical  programme.  It  began  by 
absolutely  rejecting  the  characteristic  principle  of  the  liberal 
school,  that  of  "laisser  faire."  It  gave  a  practical  aim  to 
political  economy  ;  it  regarded  the  old  separation  of  art 
and  science,  at  least  in  the  social  sciences,  as  antiquated,  and 
thus  returned  to  the  position  of  the  earlier  economists.  Al- 
though this  school  concedes  that  we  cannot  modify  economic 
institutions  so  completely  as  to  transform  history,  it  main- 


STATE   SOCIALISM  33 

tains  that  with  due  regard  for  history  we  can,  and  should, 
modify  these  institutions  to  some  extent.1  It  maintains  that 
science  should  include  art,  and  that  the  past  is  allied  with  the 
future.  That  which,  is,  that  which  will  be,  and  that  which 
ought  to  be,  —  are  all  inseparable  and  should  be  studied 
simultaneously. 

The  small  importance  attached  by  this  school  to  the  idea 
of  natural  law  explains  precisely  why  it  attaches  so  great  an 
importance  to  positive  laws  made  by  legislators,  and  considers 
them  one  of  the  most  potent  factors  of  social  evolution.2 
Far  from  sharing  the  dislike  or  the  misgivings  of  the  liberal 
school  in  this  respect,  it  favors  a  considerable  extension  of 
the  functions  of  the  state. 

This  school  has  exerted  a  wide  influence  in  recent  years, 
not  only  in  the  thoughts  of  men,  but  in  legislation  as  well. 
Most  of  the  laws,  enacted  during  the  past  twenty  years,  known 
as  labor  laws,  as  well  as  a  strong  movement  in  favor  of  an  in- 
ternational regulation  of  the  conditions  affecting  labor,  are 
largely  due  to  the  influence  of  this  school.  It  has  certainly 
rendered  a  great  service  to  science  in  widening  the  narrow, 
factitious,  too  simple,  and  irritatingly  optimistic  point  of 
view  that  prevailed  in  the  classical  school.  It  has  aban- 
doned entirely  the  attitude  of  systematic  abstention  from 
all  practical  matters,  and  to  the  question,  "  What  should  be 
done  ?  "  it  is  not  satisfied  to  give  the  sterile  answer,  "  Laisser 
faire." 

It  has  also  been  helpful  in  showing  that  the  extreme  mis- 
trust of  the  state,  manifested  by  the  liberal  school  (which 

1  For  instance  :  whereas  the  classical  school  considers  property  in  land  and 
the  wage  system  permanent  institutions  due  to  necessary  and  general  causes, 
the  historical  school  considers  them  simple  "  historical  categories,"  that  are 
due  to  various  causes,  and  have  taken  very  different  forms,  according  to  time 
and  place. 

2  "  The  laws  with  which  political  economy  is  concerned,  are  not  laws  of 
Nature ;  they  are  the  laws  enacted  by  legislators.    The  former  are  beyond 
the  will  of  man;  the  latter  are  its  product.1'  —  DE  LAVELEYE,  "Elements 
d'Economie  politique,"  p.   17. 


34  PRINCIPLES   OF   POLITICAL   ECONOMY 

would  leave  to  the  state  hardly  more  than  the  work  of  pre- 
paring the  way  for  its  own  progressive  abdication)  is  not 
scientifically  well-founded.  History  has  shown  the  state  to 
be  a  very  active  factor  of  social  progress  (e.g.  the  abolition 
of  slavery,  of  serfdom,  of  guilds,  and  the  enactment  of  indus- 
trial laws),  and  an  institution  whose  powers  are  steadily  in- 
creasing. Individual  initiative  is  often  powerless  to  bring 
about  great  social  modifications.  The  great  objection  to 
state  socialism  is  that  the  state,  even  when  it  accomplishes 
reforms  that  are  good  in  themselves,  usually  can  do  this  only 
by  means  of  laws,  i.e.  by  means  of  constraint.  But  in  every 
association,  even  voluntary,  it  is  fully  admitted  that  the 
minority  should  bow  to  the  will  of  the  majority.  Moreover, 
the  state  does  not  always  act  by  means  of  coercion,  prescrib- 
ing or  forbidding  this  or  that ;  very  often  it  acts  by  way  of 
example,  when  it  employs  labor ;  or  by  way  of  assistance,  when 
it  supports  social  institutions,  financially  or  otherwise,  or 
when  it  places  at  the  disposal  of  its  citizens  such  institutions 
as  schools,  pension  funds,  or  insurance  organizations. 

Another  grave  objection  which  has  been  raised  against 
state  socialism  is  that  too  often  the  state  has  shown  the 
most  deplorable  incapacity  in  economic  matters,  and  has  at 
times  become  the  instrument  of  parties,  rather  than  the  eco- 
nomic organ  of  the  whole  nation.1  But  these  defects  are  due 
less  to  the  essential  nature  of  the  state  than  to  its  present 
organization.  We  must  not  forget  that  the  state,  even  in 
countries  that  are  most  advanced  from  a  political  point  of 

1  Professor  Leroy-Beaulieu,  in  his  "Precis  d'Economie  Politique,"  gives 
an  excellent  summary  of  the  various  objections  urged  by  the  liberal  school 
against  the  extension  of  the  functions  of  the  state.  His  objections  are  :  — 

(1)  The  state  lacks  initiative  and  activeness,  because  it  is  not  subject  to 
the  spur  of  egoism  and  competition. 

(2)  It  possesses  no  real  superiority  over  individuals,  either  from  the  point 
of  view  of  capacity,  or  impartiality,  or  even  in  continuity  of  purpose,  when 
we  consider  the  origin,  the  manner  of  working,  and  the  inevitable  vicissi- 
tudes of  every  form  of  government,  especially  that  form  which  is  tending 
to  become  universal,  i.e.  democracy.     See  Herbert  Spencer,  "Man  versus 
the  State." 


CHRISTIAN   SOCIAL   REFORM  35 

view,  —  we  may  say,  especially  in  these  countries,  —  was  or- 
ganized for  the  purpose  of  political  functions,  and  by  no  means 
with  a  view  to  economic  functions.  The  division  of  labor  in 
matters  of  government  is  still  embryonic ;  governmental  power 
is  unstable  ;  franchise  systems,  even  that  which  is  called  "  uni- 
versal," and  which  does  not  always  represent  the  will  of  the 
majority,  are  crudely  organized; — all  these  circumstances 
unfit  the  state  for  the  accomplishment  of  economic  purposes. 
But  it  is  reasonable  to  hope  that  when  the  state  is  consti- 
tuted with  a  view  to  its  new  functions,  it  will  be  able  to 
exert  a  better  and  stronger  influence  in  the  economic  domain 
than  it  has  thus  far  exerted. 

SECTION  4.     CHRISTIAN  SOCIAL  REFORM 

This  school  may  be  divided  into  two  branches,  which 
differ  widely  in  their  ultimate  goals,  but  which  have  the 
same  starting-point  and  correspond  naturally  to  the  two 
great  divisions  of  the  Christian  church.1 

The  Catholic  /School2  firmly  believes,  with  the  classical 
school,  in  the  existence  of  natural  laws,  which  it  terms  laws 
of  Providence,  and  which  govern  social  facts  as  well  as  the 
facts  of  the  physical  world.  Only,  it  believes  that  the  opera- 
tion of  these  providential  laws  may  be  seriously  interfered 

1  The  chiefs  of  this  school  belong  either  to  the  Church  (von  Ketteler,  the 
Bishop  of    Mayence,  Pastor  Friedrich  Naumann,  Cardinal   Manning,   the 
Archbishop  of  Westminster)  or  to  political  life  (Count  de  Mun  in  France, 
Prince   Liechtenstein  in  Austria,  and   M.  Decurtius  in   Switzerland).     In 
England  the  names  which  most  frequently  recur  in  connection  with  Christian 
socialism  are  those  of   F.  D.  Maurice,  Kingsley,  Vansittart-Neale  ;    in  the 
United  States,  those  of  R.  T.  Ely,  W.  D.  P.  Bliss,  G.  D.  Herron,  and  R.  Heber 
Newton.     Consult:   Nitti,    "Catholic   Socialism";    Kaufmann,    "Christian 
Socialism"  ;  Joly,  "Le  Socialisme  Chretien"  ;  Peabody,  "Jesus  Christ  and 
the  Social  Problem. " 

2  Gide's  distinction  of   the  Catholic  and    Protestant    schools  of    social 
reform,   although  perfectly  clear  to  a  French  reader,  is  scarcely  intelli- 
gible in  this  country,  where  Protestants  and  Catholics  often  have  adopted 
similar  social  reform  programmes,  and  where  membership  of  the  same  religious 
community  by  no  means  indicates  an  agreement  concerning  social  questions. 


36  PRINCIPLES   OF   POLITICAL   ECONOMY 

with  by  the  evil  use  of  human  liberty,  and  that  this  is  pre- 
cisely what  has  taken  place.  Through  the  fault  of  man,  the 
world  is  not  what  it  ought  to  be,  —  not  what  God  wanted  it 
to  be.  Differing  from  the  liberal  school,  Catholic  reformers 
are  by  no  means  optimistic  ;  they  do  not  consider  the  social 
order  as  good  nor  even  as  naturally  tending  toward  better- 
ment. Above  all,  they  have  no  confidence  in  the  let-alone 
policy  for  establishing  harmony  and  assuring  progress,  since, 
on  the  contrary,  they  regard  liberty,  or  at  least  what  is  called 
liberalism,  as  the  true  cause  of  social  disorganization. 

The  vehemence  of  the  criticisms  which  the  Catholic  school 
directs  against  the  present  social  organization,  against  capital- 
ism, against  profit,  against  interest  (which  the  Church  in  the 
Middle  Ages  designated  as  usury — usura  vorax),  against  stock 
companies,  against  free  trade  and  all  forms  of  internationalism, 
and,  above  all,  against  free  competition,  has  led  the  liberal 
economists  to  give  it  the  name  of  Catholic  socialism.  It 
objects  strenuously,  however,  to  this  designation,  and  despite 
many  points  of  view  which  suggest  a  community  of  thought, 
it  differs  toto  orbe  from  the  socialist  school.  First  of  all,  it 
by  no  means  proposes  to  abolish  the  fundamental  institutions 
of  the  present  social  order,  —  property,  inheritance,  the 
wage-system,  —  but  rather  to  restore  and  to  strengthen  them. 
Furthermore,  it  in  no  wise  believes  in  evolution  or  the 
unlimited  progress  of  mankind,  and  is  much  less  inclined  to 
seek  its  ideal  in  the  future  than  in  a  return  to  institutions 
of  the  past,  such  as  rural  life,  and  especially  guilds  of 
employers  and  employees.  Finally,  it  professes  as  little  con- 
fidence in  the  principle  of  equality  as  in  that  of  liberty,  and 
counts  on  reestablishing  social  peace  by  means  of  three 
kinds  of  authority  :  that  of  the  father,  in  the  family  ;  that 
of  the  employer,  in  the  workshop  ;  and  that  of  the  Church,  in 
society  as  a  whole.  It  is  of  course  understood  that  these 
three  kinds  of  "  social  authority  "  imply  commensurate  duties. 

Generally  speaking,  this  school  is  not  hostile  to  the  inter- 
vention of  the  state,  which  is,  "after  the  Church,  God's 


CHRISTIAN   SOCIAL   REFORM  37 

minister  for  good."  It  even  formally  favors  such  interven- 
tion to  assure  Sunday  rest  to  the  laboring  classes,  the  regula- 
tion of  labor  within  just  limits,  etc.  However,  one  section 
of  the  Catholic  school  is  as  much  opposed  to  state  interven- 
tion as  the  liberal  school,  and  this  problem  has  given  rise  to 
very  lively  discussion  among  Catholic  social  reformers. 

The  strongest  objection  that  can  be  urged  against  this 
doctrine,  omitting  all  controversy  in  the  field  of  politics 
or  religion,  was  long  ago  formulated  by  John  Stuart  Mill, 
when  he  said  that  there  is  no  instance  of  any  class  of  society, 
in  the  possession  of  power,  ever  having  used  this  power  in 
the  interest  of  the  other  classes  of  society.  There  is  great 
danger  that  any  guardianship  by  the  upper  classes,  if  ever 
they  were  entrusted  with  the  task  of  solving  the  social 
problem,  would  confirm  Mill's  statement. 

The  Protestant  school  shows  quite  as  little  sympathy  with 
the  present  economic  order  as  the  Catholic  school.  It  like- 
wise denounces  competition  and  the  pursuit  of  mere  material 
gain.  It  regards  property  above  all  as  a  social  trust.  It 
believes  that  the  world  must  be  radically  transformed  in 
order  to  approach  more  closely  to  the  "  Kingdom  of  God," 
—  the  advent  of  which  all  members  of  the  Church  should 
anticipate  and  work  for,  even  on  earth. 

Faithful  to  its  democratic  traditions,  which  make  of  each 
Protestant  church  a  small  republic,  it  aims  to  apply  the  same 
democratic  regime  to  industry.  It  does  not  attempt  a  solu- 
tion by  means  of  guilds,  which,  in  its  opinion,  experience 
proves  unsuitable,  and  which  seem  to  develop  collective  ego- 
ism. It  proposes  the  so-called  cooperative  form  of  associa- 
tion, and  maintains  that  cooperation  is  the  exact  antithesis 
of  competition.  The  "  Christian  socialists  "  —  as  they  were 
called  in  the  days  of  Kingsley  and  Maurice  —  for  this  reason 
played  an  important  part  in  the  English  cooperative  move- 
ment of  the  middle  of  the  nineteenth  century. 

As  for  state  intervention,  it  is  difficult  to  discover  among 
Protestants  any  general  programme  concerning  this  point. 


38  PRINCIPLES    OF    POLITICAL    ECONOMY 

We  can  readily  understand  that  a  unanimity  of  opinion  is  even 
less  likely  to  exist  among  Protestant  social  reformers  than 
among  the  Catholics.  Opinions  vary  all  the  way  from 
Pastor  Stoecker's  state  socialism  (in  Germany)  to  Herron's 
evangelical  communism  (in  the  United  States).  In  England, 
Protestant  socialism  has  been  very  favorable  to  the  nation- 
alization of  land.  In  France,  it  has  generally  advocated  the 
doctrine  of  social  solidarity,  which  we  shall  now  examine. 

SECTION  5.     THE  DOCTRINE  OF  SOLIDARITY 

In  this  rapid  review  we  cannot  omit  a  school  which  is  only 
a  few  years  old,  but  whose  influence  is  rapidly  increasing,  — 
the  school  that  takes  "  solidarity  "  for  its  motto. 

The  fact  of  solidarity,  i.e.  the  mutual  dependence  of  man- 
kind, clearly  demonstrated  by  the  division  of  labor,  exchange, 
and  (as  regards  successive  generations  of  men)  by  heredity, 
did  not  escape  the  attention  of  the  classical  economists. 
Bastiat  often  speaks  of  it  in  his  "Harmonies  Economiques." 
But  he  regarded  it  as  a  natural  law,  which  did  not  require 
the  assistance  of  individuals  to  work  itself  out.  The  school 
of  solidarity,  on  the  other  hand,  conceives  solidarity  as  the 
desirable  result  —  the  express  aim  —  toward  which  we  should 
bend  our  will.  Hence  it  regards  as  the  foundation  of  soli- 
darity —  to  say  nothing  of  the  natural  phenomena  of  inter- 
dependence which  are  unconscious,  and  therefore  have  no 
moral  worth  —  those  voluntary  contractual  associations  and 
institutions  that  are  created  deliberately  with  a  viaw  to 
developing  this  feeling.  It  differs  from  the  liberal  school 
by  repudiating  the  principle  of  competition  and  the  struggle 
for  life.  It  endeavors  to  substitute  the  principle  of  coopera- 
tion between  opposing  interests,  and  the  idea  of  a  "  union 
for  existence."  To  those  who  object  that  this  belittles  indi- 
viduality, it  replies  that  individuality  is  no  less  developed  by 
helping  others  than  by  helping  one's  self.1 

1  Vinet,  the  Protestant  critic,  has  admirably  said  that  "to  give  one's  self, 
one  must  own  one's  self." 


THE   DOCTRINE    OF    SOLIDARITY  39 

It  differs  from  the  revolutionary  school  because  it  does  not 
believe  in  the  efficaciousness  of  revolution  or  expropriation 
as  a  means  for  transforming  man  or  even  his  social  environ- 
ment. It  works,  however,  for  the  realization  of  the  principal 
desiderata  of  socialism,  such  as  the  insurance  of  all  persons 
against  sickness,  accident,  etc. ;  the  greatest  possible  equality 
of  opportunity  for  all ;  the  transformation  of  property,  inher- 
itance, the  wage-system,  and  taxation ;  the  limitation  of 
money  power  ;  the  attenuation  of  competition,  etc. 

As  means  to  these  endsvit  advocates  association  in  all  its 
forms,  and  particularly  cooperative  association,  because  this 
is  the  most  complete  of  all.  But  it  is  not  hostile  to  state 
intervention  whenever  labor  legislation,  sanitary  laws,  or 
laws  concerning  pure  food  tend  to  prevent  the  degradation 
of  the  masses ;  or  whenever  certain  kinds  of  obligatory 
insurance  or  precautionary  regulations  tend  to  train  the 
various  classes  of  the  nation  in  the  practice  of  solidarity.  It 
does  not  forget  that  the  state  is  itself  the  oldest  and  most 
impressive  form  of  solidarity  among  men.  The  fact  that 
this  solidarity  is  obligatory,  instead  of  purely  voluntary, 
does  not  diminish  its  power.  Doubtless  the  habit  of  soli- 
darity does  not  acquire  its  full  moral  value  until  it  becomes 
voluntary  ;  but  the  solidarity  imposed  by  law  may  be  indis- 
pensable in  preparing  the  way  for  the  fuller  development  of 
free  cooperation. 

This  doctrine  has  succeeded  in  attracting  adherents  from 
all  classes  and  parties :  the  faithful  believers  in  the  old 
idealistic  French  socialism  of  Fourier  and  Leroux  ;  the  dis- 
ciples of  Auguste  Comte  ;  the  mystical  and  eesthetical  fol- 
lowers of  Carlyle,  Ruskin,  or  Tolstoi ;  those  who  work  in 
the  Church,  and  those  who  work  in  biological  laboratories. 
But  its  popularity  is  perhaps  due  to  the  fact  that  its  program 
is  still  quite  indeterminate.1 

1  This  school  counts  more  of  its  adherents  among  philosophers  and  sociolo- 
gists, especially  those  of  France,  than  among  economists  strictly  speaking. 
Consult  the  article  on  "Solidarity"  in  Gide's  volume  on  "Cooperation,'* 


40  PRINCIPLES    OF    POLITICAL    ECONOMY 


VI.   The  Wants  of  Man 

The  wants  of  man  are  the  underlying  motive  of  all  eco- 
nomic activity,  and  consequently  the  starting-point  of  economic 
science.  Every  living  being  requires  for  its  development 
and  the  accomplishment  of  its  purposes  some  help  from  with- 
out, and  must  assimilate  certain  elements  of  the  outside 
world.  From  the  plant  (and  even  from  the  crystal)  up  to 
man,  this  necessity  increases  with  the  increase  of  individu 
ality.  Every  want  felt  by  a  living  being  gives  rise  to  a 
desire,  and  consequently  to  an  effort  to  obtain  possession  of 
the  necessary  exterior  objects,1  because  their  possession  implies 
gratification,  whereas  the  lack  of  them  means  suffering.2 

the  works  of  Carlyle,  Ruskin,  and  Professor  R.  T.  Ely  ;  Paulsen,  "  System  of 
Ethics"  ;  and  a  recent  book  by  Le"on  Bourgeois,  "  Solidarite,"  third  edition, 
Paris,  1902. 

1  Want  or  desire  exists  only  when  it  is  directed  toward  a  particular  object 
recognized  as  capable  of  satisfying  it.     In  this  sense,  M.  Tarde  observes  that 
"the   first  cause  of  every  economic  desire  is  invention"      ("La  Logique 
Sociale,"  Chapter  7).     Eor  it  is  evident  that  the  desire  to  smoke  and  to  drink 
spirits  could  arise  only  after  the  discovery  of  tobacco  and  after  the  preparation 
of  alcoholic  beverages.    Similarly,  the  habit  of  cycling  owes  its  origin  to  the 
invention  of  the  bicycle. 

We  are  told  that  "necessity  is  the  mother  of  invention."  This  is  also 
true  in  the  sense  that  invention,  or  the  search  for  objects  and  devices  that 
will  procure  satisfaction,  is  itself  the  result  of  natural  wants  or  instincts,  such 
as  hunger,  cold,  fear,  etc.  The  discovery  of  tobacco  and  of  alcoholic  drinks, 
or  at  least  the  widespread  consumption  of  these  things,  must  evidently  re- 
spond to  a  need  of  the  nervous  system  that  is  felt  by  many  persons;  the  inven- 
tion of  the  bicycle  is  the  result  of  the  general  need  for  rapid  transit. 

2  The  wants  of  man  are  innumerable.     It  would  be  useless  to  attempt  to 
enumerate  them.     They  may,  however,  be  classified,  according  to  primitive 
archaeology  and  our  knowledge  of  the  customs  of  savage  tribes,  under  the 
following  heads :  — 

(1)  Food.  This  was  certainly  the  first  of  wants,  inasmuch  as  the  existence 
not  only  of  man  but  of  every  organism  depends  directly  on  it.      The  life  of 
animals  and  of  savage  mankind  is  entirely  taken  up  with  the  quest  for  food. 
In  all  civilized  societies,  too,  it  plays  the  greatest  part.    More  than  half  the 
total  wealth  of  society  is  produced  for  use  as  food. 

(2)  Struggle  for  life,  i.e.  defence  and  combat.     Next  to  food,  with  which 
it  is  closely  allied,  this  want  is  most  important.     Even  among  animals  it  is  of 


THE   WANTS   OF   MAN  41 

The  wants  of  man  have  several  characteristics,  each  of 
which  is  important  because  some  great  economic  law  is  based 
on  it.1  These  characteristics  are  the  following  :  — 

(1)  Human  wants  are  unlimited  in  number.  This  feature 
distinguishes  man  from  the  inferior  animals  and  is  the  main- 
spring of  civilization  in  the  strictest  sense  of  the  word.  To 
civilize  a  people  is  to  increase  its  wants. 

The  wants  of  humanity  are  at  first  like  those  of  a  child. 
At  birth  the  child  needs  nothing  but  a  little  milk  and  a  warm 
covering  ;  but  soon  he  requires  more  varied  food,  more  com- 
plicated garments,  and  toys  ;  each  year  gives  rise  to  new 
needs  and  new  desires.  The  more  he  learns  and  sees,  the 
more  numerous  and  intense  are  these  desires. 

We  are  to-day  conscious  of  a  thousand  wants  that  were 

very  great  moment,  although  it  does  not  give  rise  to  any  industry  among 
them,  —  unless  we  regard  in  this  light  the  traps  that  some  insects  prepare  for 
their  victims,  like  the  spider's  web.  Usually,  the  weapons  used  by  animals 
are  purely  natural. 

(3)  Housing.  The  need  of  shelter  is  felt  even  by  animals,  and  gives  rise 
among  them  to  many  curious  industries. 

(4)  Ornament.  It  may  cause  some  surprise  that  we  give  this  want  so  emi- 
nent a  place.     Yet  prehistoric  archseology  and  the  accounts  given  by  travel- 
lers among  primitive  peoples  show  that  this  need  is  experienced  even  earlier 
than  the  need  for  clothing.     It  is  the  first  need  that  distinguishes  man  from 
animals.      The'ophile  Gautier  has  remarked  that  "  no  dog  ever  conceived  of 
wearing  earrings ;  but  the  stupid  Papuans,  who  eat  clay  and  earthworms, 
hang  colored  berries  and  shells  from  their  ears,  while  they  go  about  stark 
naked." 

After  these  four  fundamental  wants,  others  arise  and  mark  the  beginnings 
of  civilization.  These  civilized  wants  fall  under  the  head  of  religion  (charms, 
idols),  clothing  (which  varies  according  to  the  requirements  of  climate, 
weather,  good  manners,  social  rank,  and  aesthetic  taste),  recreation  and  art 
(musical  instruments,  games,  carved  bones  and  stones),  transportation  and 
intercourse  (boats,  chariots,  social  clubs),  instruction  (stone  or  bronze  tablets, 
papyrus,  parchment,  books),  and  comfort,  the  last  of  all. 

The  present  relative  importance  of  wants  is  discussed  in  Book  V. 

1  Although  the  study  of  human  wants  is  of  fundamental  importance  to 
political  economy,  it  has  been  almost  entirely  neglected,  if  we  except  Fourier's 
somewhat  fantastic  contributions  to  the  subject.  It  has,  however,  very  recently 
been  made  the  subject  of  an  important  book  by  Tarde  entitled  "La  Psy- 
chologic e"conomique  "  (Paris,  1902). 


42  PRINCIPLES    OF   POLITICAL   ECONOMY 

unknown  to  our  grandfathers,  —  wants  of  comfort,  hygiene, 
cleanliness,  education,  travel,  intercourse.  It  is  certain 
also  that  our  grandchildren  will  feel  new  wants.  If  we 
should  discover,  on  another  planet,  beings  superior  to  men, 
we  should  find  among  them  a  multitude  of  wants  of  which 
we  in  this  world  know  nothing.  Nations  are  doomed  if  they 
are  too  easily  satisfied,  and  if  their  desires  do  not  extend 
outside  the  small  circle  of  necessity.  Nations  whose  people 
are  content  with  a  handful  of  ripe  fruit  and  a  sleeping-place 
in  the  shade  will  succumb  in  the  international  struggle  for 
life.  They  are  destined  to  disappear  quickly  from  a  world 
in  which  they  scarcely  know  how  to  subsist.1 

Is  this  unlimited  multiplication  of  wants  commendable  ? 
Is  it  necessary  ?  Is  it  not  to  be  desired  that  wants  should 
cease  increasing  so  rapidly  ?  Admitting  that  the  increase  of 
wants  gives  rise  to  an  increase  of  production  and  of  wealth, 
is  not  nature  making  a  dupe  of  man,  inasmuch  as  with  the 
satisfaction  of  every  want  another  want  immediately  takes 
its  place  ?  Is  it  not  true,  therefore,  that  man  is  con- 
stantly in  pursuit  of  a  constantly  receding  goal,  and  is 
unable  ever  to  acquire  peace  of  mind?  An  example  of 
this  is  furnished  by  our  working  classes,  whose  envy  of 
others  increases  with  their  own  well-being.  Would  it  not, 
therefore,  be  better  to  diminish  our  wants  than  to  increase 
our  wealth  ? 

Let  us  not  be  deceived.  If  we  desire  a  diminution  in  the 
number  and  intensity  of  wants  that  aim  at  wealth,  which 
to-day  make  up  too  great  a  part  of  our  social  activity,  this 
is  in  perfect  agreement  not  only  with  Christian  ascetics  and 
mystics  like  Tolstoi,  but  even  with  such  economists  as  John 
Stuart  Mill.  But  this  desire  is  conditioned  on  the  assump- 
tion that  these  wants  will  be  abandoned  in  order  that  nobler 
ones  may  take  their  place  ;  for  if  we  simply  gave  them  up 

1  The  rise  of  wants  through  invention,  and  their  propagation  by  imitation, 
are  studied  by  M.  Tarde  in  the  book  already  mentioned,  and  in  "  Les  Lois  de 
1'Iinitation." 


THE   WANTS   OF   MAN  43 

without  filling  their  place,  that  would  mean  the  retrogression 
of  social  life  toward  the  animal  state. 

Moreover,  it  must  be  remarked  that  even  purely  economic 
wants  are  not  devoid  of  moral  value,1  for  every  new  want 
constitutes  a  new  social  bond  ;  generally  we  can  satisfy  our 
wants  only  with  the  aid  of  others,  and  this  fact  strengthens 
the  feeling  of  solidarity.  The  man  who  has  no  wants  —  the 
hermit  —  suffices  unto  himself,  which  is  precisely  what  a 
man  should  not  do.  As  for  the  working  classes,  we  should 
rejoice,  not  regret,  that  new  wants  and  desires  constantly 
plague  their  minds;  for  without  new  wants  they  would  have 
remained  in  an  eternal  condition  of  slavery. 

(2)  Wants  are  limited  in  intensity.  This  is  one  of  the 
most  important  propositions  in  political  economy,  for  on  it,  as 
we  shall  see,  is  founded  a  new  theory  of  value. 

Wants  are  limited  in  intensity  because  every  want  is  satia- 
ble, i.e.  a  certain  amount  of  a  certain  kind  or  kinds  of  wealth 
will  satisfy  it  completely.  It  is  evident  that  a  man  needs 
only  a  certain  amount  of  bread  to  satisfy  his  hunger,  and  a 
certain  amount  of  water  to  slake  his  thirst.  We  may  say 
that  a  want  decreases  in  intensity  up  to  the  point  of  satiety. 
Then  the  want  is  extinguished  and  is  replaced  by  disgust  or 
even  suffering.2  It  is  torture  to  suffer  thirst;  but  it  was 
also  torture,  in  the  Middle  Ages,  to  undergo  the  "watering 
operation,"  by  which  the  victim  was  compelled  to  absorb 
excessive  quantities  of  water. 

The  more  natural  a  want  is,  i.e.  the  more  physiological  its 
nature,  the  more  clearly  drawn  is  its  limit.  It  is  easy  to  tell 
how  many  pounds  of  bread  and  how  many  pints  of  water  a 

1  The  theory  of  historical  materialism,  taught  especially  by  the  school  of 
Marx  (and  by  Loria  in  his  book  on  the  Economic  Bases  of  Social  Organiza- 
tion), considers  economic  wants  the  source  of  all  other  wants,  —  political, 
aesthetic,  religious,  etc. 

2  This  is  like  the  well-known  mathematical  series  which  diminish  until 
they  reach  zero  and  then  increase,  as  minus  quantities,  below  zero.     The  de- 
grees of  want-intensity  are  the  positive  quantities  of  the  series  ;  the  degrees 
of  dislike  are  the  negative  terms  ;  zero  is  the  point  of  satiety. 


44  PRINCIPLES    OF   POLITICAL   ECONOMY 

man  needs.  But  the  more  artificial  or  social  a  want  is,  the 
more  elastic  is  the  limit  marking  its  satisfaction.  It  is  cer- 
tainly not  an  easy  matter  to  tell  how  many  horses  would 
satisfy  a  sportsman,  or  how  many  dresses  would  lead  a  fash- 
ionable woman  to  cry  "  Enough  !  "  or  the  number  of  rubies 
desired  by  an  Indian  rajah,  or  how  much  money  would  com- 
pletely satisfy  the  wants  of  a  civilized  man.  Nevertheless, 
we  may  say  that  even  for  these  wants  there  is  a  limit ;  in 
these  respects,  too,  satiety  is  inevitable.  At  all  events  each 
new  possession  gives  less  pleasure  than  the  preceding  one.1 

(3)  Wants  are  competitive,  i.e.   one   want  can  often   be 
developed  only    at   the   expense    of   other  wants  which   it 
abolishes   or   absorbs.     According   to   the   proverb,  the  old 
must  make  room  for  the  new  ;  similarly,  one  want  takes  the 
place  of  another.     This  simple  fact  is  the  basis  of  an  impor- 
tant economic  law  called  the  law  of  the  substitution  of  wants. 
Progress   consists  generally  in  replacing  inferior  wants  by 
higher  wants.     To  combat  drunkenness,  for  example,  tem- 
perance societies  have  found  nothing  more  successful  than 
"temperance    restaurants"    in   which   an   effort  is  made  to 
accustom  people  to  drinking  tea  and  coffee.     We  should  also 
note  that  a  material  want  may  give  way  to  an  intellectual 
want  (the  saloon  to  the  reading-room)    or    a  moral  want 
(when,  for  example,  a  laborer  deprives  himself  of  a  drink  in 
order  to  pay  his  dues  to  a  benefit  society,  a  labor  organiza- 
tion, or  a  reform  club). 

(4)  Wants  are  complementary ;  they  form  groups.      This 
seems  to  be  antagonistic  to  the  above-named  principle,  yet  it 
is  not  so.     Are  not  the  persons  engaged  in  any  branch  of 
production  competitors  as  well  as  co-workers  ?      Similarly, 

1  In  the  'case  of  money,  satiety  seems  to  be  most  infrequent  and  improbable. 
Why  ?  For  the  simple  reason  that  money  is  the  only  kind  of  wealth  which 
has  the  property  of  satisfying,  not  only  a  specific  want,  but  all  possible  wants ; 
consequently  it  is  desired  until  all  our  wants  are  entirely  satisfied.  This  puts 
the  point  of  satiety  exceedingly  far  off.  Nevertheless,  it  is  evident  that  an 
extra  dollar  does  not  provide  a  millionnaire  with  a  pleasure  at  all  comparable 
to  that  which  it  procures  for  a  beggar. 


THE  WANTS   OF  MAN  45 

there  is  competition  among  wants  of  the  same  sort,  among 
wants  that  are  interchangeable ;  but  there  is  harmony  among 
wants  of  different  kinds.  The  want  of  food  is  allied,  in  civil- 
ized societies,  with  the  want  of  tables,  chairs,  table-cloths, 
napkins,  glassware,  knives,  and  forks.  In  order  to  obtain  a 
maximum  of  enjoyment,  many  pleasures  must  be  combined, 
and  thus  give  rise  simultaneously  to  large  groups  of  wants. 

(5)  Wants,  even  acquired  or  artificial  wants,  tend  to 
become  a  matter  of  habit.  They  become,  as  the  popular 
expression  aptly  puts  it,  our  "second  nature."  This,  as  we 
shall  see,  is  of  great  importance  in  the  determination  of 
wages.  The  customary  plane  of  existence  —  the  standard 
of  living  —  cannot  easily  be  lowered.  There  was  a  time 
when  workmen  wore  neither  shirts  nor  shoes,  when  they  had 
neither  coffee  nor  tobacco,  when  they  ate  neither  meat  nor 
white  bread ;  but  to-day  these  wants  are  so  deep-seated,  they 
form  so  fundamental  a  part  of  our  nature,  that  a  workman, 
if  he  were  deprived  of  them  and  suddenly  reduced  to  the 
condition  of  his  social  equals  in  the  time  of  good  King 
Henry,  would  probably  perish. 

If  we  add,  finally,  that  a  habit  which  has  been  transmitted 
from  generation  to  generation  tends  in  time  to  become 
established  through  heredity,  and  that  our  senses  are  every 
day  becoming  more  subtle  and  more  exacting,  we  shall 
understand  the  despotic  power  that  may  eventually  be 
acquired  by  a  want  that  originally  seemed  to  be  futile  or 
insignificant. 

It  must  not  be  supposed,  however,  that  wants  once  ac- 
quired are  perpetual.  There  is,  as  we  have  said,  a  competi- 
tion or  rivalry  among  some  wants.  Some  of  them  are 
vanquished  and  disappear.  The  show-cases  of  our  museums 
are  filled  with  objects  that  at  one  time  satisfied  a  real  want, 
but  which  now  correspond  to  no  human  desire  save  that  of 
the  collector  of  curios.  But  wants  perish  only  when  they 
are  supplanted  by  others  that  are  more  strongly  felt  or 
whose  satisfaction  affords  greater  enjoyment. 


46  PRINCIPLES   OF   POLITICAL  ECONOMY 

VII.   What  is  Wealth  ? 

We  have  said  that  man,  in  order  to  satisfy  his  wants,  is 
obliged  to  make  use  of  parts  of  the  outer  world,  —  of  objects 
generally  known  as  wealth  or  riches.  In  ordinary  speech 
the  word  "  wealth  "  is  synonymous  with  the  word  "  fortune  " 
and  means  extensive  valuable  possessions.  It  seems  strange, 
therefore,  to  apply  the  term  "wealth"  to  a  loaf  of  bread. 
Yet  this  is  perfectly  correct  and  scientific,  if  we  mean  by 
"  wealth  "  all  that  can  satisfy  human  wants.  The  capacity 
for  satisfying  human  wants  is  called  "  utility."  Accordingly, 
to  avoid  confusion,  the  term  "utilities"  would  perhaps  be 
better  than  the  term  "wealth." 

The  utility  of  a  thing  presupposes  the  discovery  of  a  rela- 
tion between  its  physical  properties  and  some  human  want. 
Thus,  bread  is  useful  because  we  require  nutrition  and  be- 
cause wheat  contains  nutritive  elements.  Again,  diamonds 
are  much  desired  because  it  is  the  nature  of  man  to  take 
pleasure  in  the  contemplation  of  brilliant  objects,  and  be- 
cause diamonds  have  a  refractory  power  superior  to  that  of 
any  other  known  body  and  productive  of  brilliant  rays  of 
light. 

Thus  utility  depends,  first,  on  a  want  felt  by  man,  and, 
secondly,  on  an  object  capable  of  satisfying  that  want.  Of 
these  two  features  of  utility,  man,  not  the  object,  is  the  more 
important.  One  might  be  disposed  to  believe  the  contrary, 
viz.,  that  the  anticipated  satisfaction  consists  in  properties  of 
things,  that  the  utility  of  gold  is  of  the  same  nature  as  its 
weight  or  its  lustre  or  its  inoxidizability,  —  in  other  words, 
that  utility  attaches  to  the  objects  themselves,  like  a  quality 
which  appeals  to  the  senses.  This  is  not  so.  Utility  arises 
only  with  desire  and  vanishes  with  the  extinction  of  desire. 
As  a  shadow  follows  a  butterfly  from  one  flower  to  another, 
so  utility  accompanies  desire,  and  abides  only  where  desire 
rests.  It  is  subjective,  not  objective.  It  matters  little  that  an 
object  has  qualities  that  may  satisfy  the  wants  of  man,  if 


WHAT    IS    WEALTH?  47 

man  is  not  aware  of  the  fact,  or  if,  because  of  insufficient 
power,  he  is  unable  to  utilize  the  object.  In  both  cases  the 
object  in  question  is  not  a  utility,  and  therefore  is  not  wealth. 
Potatoes  were  not  wealth  until  Parmentier,  with  great  diffi- 
culty, propagated  their  use  as  food.  The  falls  of  Niagara 
did  riot  represent  economic  wealth  until  we  learned  how  to 
utilize  their  motive  power.  Every  object  in  the  world 
might  be  useful  to  man  and  capable  of  increasing  wealth. 
But  at  present  some  objects  are  as  little  entitled  to  be  called 
"  wealth  "  as  the  fertile  lands  or  precious  stones  which  as- 
tronomers discover  on  the  planet  Mars. 

Contrariwise,  it  matters  little  that  an  object  has  received 
from  nature  none  of  the  properties  adapting  it  to  the  satis- 
faction of  our  wants  if  only  we  think  that  it  possesses  them. 
For  hundreds  of  years  men  have  attributed  wonderful  prop- 
erties to  various  relics,  more  or  less  authentic,  which  have 
therefore  been  regarded  as  incomparable  wealth.  There  are 
many  mineral  waters  and  patent  medicines  that  command 
high  prices,  although  their  curative  powers  are  exceedingly 
doubtful.  How  many  things  there  are  whose  value  and 
whose  utility  is  due  to  a  passing  whim  or  fancy !  There  are 
many  costumes  that  are  no  longer  worn,  paintings  that  are 
no  longer  admired,  coins  that  have  no  purchasing  value,  and 
remedies  that  do  not  cure.  The  list  would  be  long  if  it 
were  to  include  all  kinds  of  wealth  whose  utility  was  as  flit- 
ting as  the  want  that  gave  rise  to  them.  Nevertheless,  if 
the  desire  of  the  collector  of  relics  (perhaps  the  most  intense 
of  all  desires)  should  happen  to  fix  on  one  of  these  kinds  of 
dead  wealth,  these  worthless  objects  would  acquire  a  new 
lease  of  life  and  might  possess  a  value  greater  than  that 
which  was  originally  attributed  to  them. 

In  the  opinion  of  scientists  alcoholic  drinks  do  not  possess 
any  of  the  good  qualities  sometimes  attributed  to  them ; 
they  furnish  neither  strength  nor  warmth.  But  what  does 
this  matter  from  the  view-point  of  the  economist  ?  Millions 
of  men  in  all  countries  unfortunately  believe  them  to  possess 


48  PRINCIPLES   OF   POLITICAL   ECONOMY 

certain  desirable  qualities  ;  they  therefore  constitute  wealth, 
—  wealth  that  is  estimated  at  many  millions  and  by  means 
of  which  many  governments  obtain  a  large  part  of  the  public 
revenues. 

Hence  we  must  define  wealth  as  all  that  mankind  believes 
to  be  useful  and  can  utilize.1 

It  is  unfortunate  for  a  science  to  borrow  its  terminology 
from  everyday  speech.  It  is  plain,  for  example,  that  in 
political  economy  the  word  "  utility  "  has  an  unusual  mean- 
ing. For  this  reason  it  has  been  proposed  to  substitute 
some  newly  coined  word.  In  the  first  edition  of  this  book 
(published  in  1883)  we  proposed,  and  have  since  then  em- 
ployed, the  word  "desirability."  This  word  has  the  two- 
fold advantage  of  placing  the  emphasis  on  the  subjective 
side  of  economic  utility,  and  avoiding  all  reference  to  the  real 
or  imaginary,  moral  or  immoral,  causes  that  may  give  rise 
to  desire.  In  his  "  Course  of  Political  Economy,"  published 
in  1896,  Professor  Vilifredo  Pareto  suggested,  and  has  since 
then  employed,  the  word  "  ophelimity,"  which  possesses  the 
same  advantages  but  has  the  inconvenience  of  being  intelli- 
gible only  to  those  who  are  familiar  with  Greek.  But 
neither  of  these  terms  has  been  generally  accepted  in  the 
language  of  economics.  We  must,  therefore,  be  satisfied 
with  the  word  "utility,"  giving  it  the  particular  meaning 
that  we  have  attached  to  it. 

Another  confusion  due  to  the  same  cause  is  the  belief  that 
since  utility  is  a  property  of  things  it  can  be  possessed  only 
by  matter;  that,  consequently,  all  wealth  is  material.  Many 
economists,  even  to-day,  declare  that  the  term  "  wealth " 
implies  material  goods,  —  for  wealth  is  that  which  can  be 
weighed,  measured,  and  accumulated. 

This  mistake  could  never  have  arisen  if,  instead  of   the 

1  This  is  the  reason  why  M.  Tarde  regards  faith  and  invention  as  the 
sources  of  all  wealth  :  faith,  because  it  is  necessary  that  we  believe  in  the  use- 
fulness of  the  object ;  invention,  because  it  is  necessary  that  we  be  able  to 
use  it. 


WHAT   IS   VALUE?  49 

term  "  wealth,"  we  had  used  the  term  "  utility "  ;  for  it  is 
evident  that  acts  may  be  useful  quite  as  well  as  things.  How 
great  is  the  utility  of  the  services  rendered  by  our  fellow- 
men  !  Although  the  expression  has  an  unpleasant  sound,  is 
it  not  true  that  we  "  make  use  "  of  our  friends,  of  our  em- 
ployers, of  our  subordinates,  as  well  as  of  things  ?  It  may 
be  objected  that  our  fellow-creatures  cannot  be  counted  and 
evaluated  in  the  same  way  as  material  wealth,  unless  they 
are  slaves,  i.e.  unless  they  have  become  things.  In  reply  to 
this,  it  must  be  said  that  persons  are  of  course  not  things 
and  cannot  be  regarded  as  wealth.  But  their  acts  and  their 
labors,  —  the  prescription  written  by  a  physician,  the  lesson 
given  by  a  teacher,  the  advice  of  a  lawyer,  the  performance 
of  an  actor,  the  playing  of  a  musician,  the  service  of  our 
domestics,  —  why  should  not  these  be  regarded  as  wealth? 
Are  not  all  of  these  acts  useful  ?  Are  they  not  all  paid  for  ? 
After  all,  this  problem  is,  in  the  main,  a  simple  question 
of  terminology.  It  is  an  easy  matter  to  bring  all  the  dis- 
putants to  an  agreement,  without  doing  violence  to  every- 
day language,  by  reserving  the  word  "  wealth  "  for  corporeal 
objects,  and  by  designating  as  "  services  "  all  the  acts  of  man 
that  are  capable  of  furnishing  enjoyment  or  utility. 

VIII.   What  is  Value? 

In  ordinary  speech  the  words  "  value  "  and  "  wealth  "  (or 
"riches")  are  synonymous.  Both  involve  the  idea  of  utility. 
A  thing  that  serves  no  purpose  cannot  be  wealth  or  value. 
But  if  we  look  into  the  matter  more  closely  we  shall  see  that 
these  two  words  do  not  express  quite  the  same  idea,  and  that 
sometimes  they  may  imply  even  contrary  ideas. 

The  idea  of  wealth  is  allied  to  that  of  abundance  ;  to  have 
too  much  of  everything  would  be  the  acme  of  wealth.  The 
idea  of  value,  on  the  other  hand,  is  most  closely  allied  with 
that  of  scarcity  ;  the  objects  that  are  most  scarce,  other  things 
being  equal,  possess  the  greatest  value. 


50  PRINCIPLES    OF   POLITICAL   ECONOMY 

Suppose  that  the  magic  wand  of  some  fairy,  or  simply  the 
unlimited  progress  of  science  and  industry,  had  made  all 
objects  as  abundant  as  the  water  of  the  rivers  or  the  sand  of 
the  seashore  ;  men  then  would  only  need  to  help  themselves 
to  as  much  as  they  required  of  all  things.  Would  not  this 
be  the  maximum  of  wealth  ?  And  yet,  is  it  not  evident  that 
on  this  hypothesis  all  things,  because  of  their  superabundance, 
would  have  lost  all  value  ?  In  fact,  they  would  then  have 
no  more  value  for  an  individual  than  the  water  or  sand  to 
which  we  have  compared  them.  Is  it  not  plain,  moreover, 
that  in  such  a  fairyland  as  this  all  men  would  be  equally 
wealthy,  just  as  to-day  the  sun  shines  equally  on  the  million- 
naire  and  the  beggar  ?  * 

The  idea  of  value,  at  least  in  the  ordinary  acceptance  of 
the  term  "money  value,"  implies  the  thought  of  exchange, 
while  the  idea  of  wealth  implies  nothing  of  the  kind.  This 
distinction  is  a  consequence  of  the  preceding  one,  for  the  pos- 
sibility of  exchange  involves  scarcity.  There  is  no  market 
and  no  purchaser  for  things  that  are  everywhere  abundant, 
—  for  water,  air,  or  even  for  land  in  newly  settled  countries. 
Yet  these  things  are  wealth,  but  have  no  value.  There  are 
also  goods  which,  although  scarce,  cannot  be  exchanged,  be- 
cause they  are  by  their  nature  not  transferable.  Health,  for 

1  J.  B.  Say  regarded  this  problem  as  the  knottiest  in  political  economy, 
and  expressed  it  in  these  terms,  "  Since  wealth  is  composed  of  the  value  of 
things  possessed,  how  can  a  nation  be  wealthiest  when  things  are  at  the 
lowest  price  ?"  And  Proudhon,  in  his  "  Economic  Contradictions,"  defied 
any  thoughtful  economist  to  answer  the  question.  The  supposed  difficulty 
is  due  to  the  fact  that  the  first  clause  of  Say's  phrase  contains  a  false  defini- 
tion. It  is  not  true  that  "wealth  is  composed  of  values."  But  the  second 
clause  is  correct, — a  nation  is  "  wealthiest  when  things  are  at  the  lowest 
price,"  because  here  the  word  "wealth"  or  "riches"  is  taken  in  its  true 
sense,  viz.,  abundance. 

Madame  de  Se'vigne',  who  cared  little  for  economics,  understood  this  per- 
fectly well  when  she  wrote  from  her  castle  of  Grignan,  in  1673:  "All  our 
barns  are  full  of  wheat,  and  I  haven't  a  cent.  Surrounded  by  wheat,  I  am 
suffering  want."  She  meant  to  say  that  the  harvest  had  been  a  rich  one,  but 
that  it  nevertheless  possessed  little  value. 


WHAT   IS    VALUE?  51 

example,  which  would  certainly  possess  great  value  if  it  could 
be  purchased,  or  a  fine  system  of  navigable  rivers,  represents 
great  wealth  but  not  value. 

Robinson  Crusoe  had  certainly  accumulated  great  wealth 
on  his  lonely  island  ;  but  it  was  not  value  until  the  arrival 
of  the  first  vessel  brought  him  into  relations  with  the  rest 
of  mankind  and  made  it  possible  to  exchange  this  wealth. 
It  is  for  this  reason  that  the  problem  of  value  usually 
forms  part  of  the  study  of  exchange,  and  we  shall  here 
simply  define  it. 

But  the  most  essential  characteristic  of  value  is  the  idea  of 
a  relation  between  two  things,  or  rather  (as  the  things  them- 
selves are  of  secondary  importance),  a  relation  between  two 
desires  or  two  wants.  In  other  words,  value  implies  not  only 
a  desire  —  which  might  be  conceived  as  existing  alone  —  but 
the  preference  given  to  one  thing  over  another,  i.e.  a  com- 
parison of  desires.  Value  cannot  be  conceived  without  a 
weighing  of  two  things,  or  a  comparison  between  them. 

Wealth  and  utility  may  exist  of  themselves,  like  the  wants 
which  they  supply.  When  we  say  that  a  thing  —  a  gun  or  a 
horse  —  is  useful,  we  make  a  statement  that  is  perfectly  clear 
and  intelligible.  But  if  we  say  that  a  gun  or  a  horse  is  worth, 
such  a  statement  is  incomplete  and  meaningless  unless  we 
add  how  much  it  is  worth.  We  must  add  that  it  is  worth  so 
much  money,  or,  if  we  are  living  among  savages,  so  many 
pieces  of  calico,  or  so  many  elephant  tusks  ;  that  is  to  say, 
we  must  compare  it  to  some  other  kind  of  wealth. 

Value,  like  weight  or  size,  is  therefore  a  relative  notion. 
If  there  were  only  one  object  in  the  universe,  it  could  not  be 
called  large  or  small,  light  or  heavy  ;  nor  could  we  say  that 
it  had  much  or  little  value.  When  we  say  that  an  object 
has  "  great  value  "  the  element  of  comparison,  although  not 
expressed,  is  understood.  We  mean  that  it  has  great  value 
expressed  in  money,  in  which  case  we  compare  it  to  pieces 
of  coin  ;  or  else  we  mean  that  it  occupies  a  high  rank  among 
riches,  in  which  case  we  compare  it  to  all  other  wealth  con- 


52  PRINCIPLES   OF   POLITICAL  ECONOMY 

sidered  collectively.  Similarly,  when  we  say,  without  any 
comparison,  that  platinum  is  very  heavy,  we  really  mean  either 
that  it  has  a  high  specific  gravity  compared  to  water  (the 
standard  of  comparison)  or  that  it  occupies  a  comparatively 
high  place  in  a  list  of  elements  arranged  according  to  weight.1 

This  matter  is  worth  investigating.  Why  do  we  attach 
value  to  an  object  ?  A  little  reflection  shows  that  there  are 
two  different,  and,  in  a  way,  opposite  answers  to  this  question. 
We  may  value  things  because  of  the  pleasure  they  give  us  ; 
or,  we  may  value  them  because  of  the  effort,  the  trouble  or 
the  pain  involved  in  their  acquisition.  These  are,  as  a  mat- 
ter of  fact,  the  two  ideas  Avhich  underlie  the  concept  of  value, 
and  which  we  hold  to  be  true  and  inseparable.  Economists 
have  usually  placed  all  the  emphasis  on  one  of  these  two  ideas, 
and  minimized  the  significance  of  the  other.  The  innumer- 
able theories  of  value  that  have  been  offered  may  be  classi- 
fied under  these  leading  ideas ;  the  element  of  pleasure  is 
foremost  in  those  theories  which  found  value  on  utility,  while 
the  element  of  pain  is  emphasized  by  the  theories  based  on 
cost  or  labor. 

We  shall  explain  each  of  them  briefly. 

SECTION  1.     UTILITY 

Utility,  the  quality  which  some  things  have  of  satisfying  our 
wants,  is,  as  we  have  seen,  the  characteristic  of  wealth.  It 
would  seem  natural,  therefore,  to  regard  it  as  the  cause  of 
value.  This  was  indeed  the  explanation  given  by  the  first 
economists  —  the  physiocrats,  Condillac  and  J.  B.  Say. 

When  two  objects  satisfy  the  same  want,  this  explanation 
of  value  is  satisfactory.  The  degree  of  value  in  such  a  case 
seems  to  correspond  exactly  to  the  degree  of  utility.  Of 

1  It  follows  that  we  ought  never  to  speak  of  a  rise  or  fall  of  all  values.  For 
if  value  is  nothing  more  than  an  order,  a  classification,  or  a  hierarchy  estab- 
lished among  articles  of  wealth,  how  is  it  conceivable  that  all  values  can  rise 
or  fall  simultaneously  ?  Those  that  rise  in  the  scale  must  take  the  place  of 
others  which  therefore  fall. 


UTILITY  53 

two  fruits  we  prefer  the  more  savory;  of  two  sheep  the  fat- 
ter ;  of  two  houses  the  more  comfortable  ;  of  two  farms  the 
more  fertile  ;  and  if  the  two  objects,  for  instance  two  bushels 
of  wheat,  provide  the  same  amount  of  gratification,  they  have 
as  a  rule  the  same  value.  But  if  we  consider  objects  satisfy- 
ing different  wants,  —  for  instance  a  loaf  of  bread  and  a  hat 
—  this  theory  fails  to  tell  which  is  the  more  useful.  It  fails 
therefore  to  explain  value. 

It  may  be  suggested  that  we  should  classify  our  wants 
according  to  reason,  or  ethics,  or  hygiene,  just  as  the  seven 
prismatic  colors  are  classed  according  to  the  amplitude  of 
their  vibrations.  Shall  we  then  put  at  the  head  of  the  list 
those  objects  that  satisfy  the  most  essential  wants,  and, 
among  these,  place  first  those  that  best  satisfy  our  essential 
wants  ?  If  we  do  this,  we  shall  have  a  long  list  of  objects 
possessing  value,  each  occupying  the  place  to  which  its 
relative  utility  entitles  it.  A  glance  at  such  a  list  would 
show  that  the  value  of  a  commodity  is  not  directly  propor- 
tionate, but  often  inversely  proportionate,  to  its  rational 
utility.  What,  on  the  other  hand,  are  the  things  that  would 
occupy  a  low  place  in  a  list  arranged  according  to  values? 
Wheat,  coal,  iron,  water,  —  just  the  objects  that  satisfy  the 
most  fundamental  and  essential  human  wants.  The  goods 
that  would  stand  highest  in  this  list  of  values  would  be 
gold,  diamonds,  lace,  perhaps  a  broken  piece  of  porcelain 
coming  from  a  collection,  or  a  rare  edition  of  an  old  volume 
that  no  one  has  read  or  ever  will  read,  —  all  objects  that  serve 
only  to  satisfy  our  curiosity  or  to  please  our  vanity. 

Nor  can  it  be  objected  that  this  condition  of  things  is 
due  to  man's  foolishness,  —  that  if  men  were  wise  the  order 
of  values  would  be  identical  with  the  order  of  rational  utili- 
ties. It  is  not  our  province  to  investigate  what  goods  man 
ought  to  prefer ;  the  theory  of  value  should  explain  that 
which  is,  not  that  which  ought  to  be.  The  above  objection, 
moreover,  is  not  valid.  Even  if  the  earth  were  inhabited 
only  by  wise  men,  a  glass  of  water  would  not  be  worth  a 


54  PRINCIPLES   OF   POLITICAL   ECONOMY 

cent  more  than  it  is  now,  although  nothing  is  better  adapted 
to  the  satisfaction  of  a  fundamental  human  want.  We  must 
not  forget  what  we  have  already  said  :  that  the  value  of  any 
object  varies  constantly  according  to  circumstances.  It  would 
therefore  be  manifestly  absurd  to  say  that  the  value  of  a 
commodity  is  determined  by  its  utility.  For  there  are  many 
utilities,  many  uses  for  one  and  the  same  thing,  and  we  must 
consequently  ask,  if  utility  determines  value,  —  What  utility  ? 
The  utility  of  a  given  object  is  not  the  same*  for  A  as 
for  B.  Again,  an  object  may  possess  a  degree  of  utility  in 
the  evening  which  it  did  not  have  in  the  morning. 

To  escape  this  difficulty,  an  attempt  has  been  made  to 
supplement  the  notion  of  utility  by  that  of  scarcity.  Utility 
alone  cannot  create  value  ;  it  remains,  so  to  speak,  latent 
unless  it  is  combined  with  the  quality  of  scarcity.  Value  is 
in  this  sense  scarce-utility,  as  expounded  by  Walras  (the 
elder)  in  France,  and  Senior  in  England.  This  modification 
of  the  preceding  explanation  enables  us  to  solve  many  of  the 
difficulties  that  troubled  us.  The  idea  of  scarcity  alone, 
however,  is  insufficient,  unless  we  make  it  include  much  that 
the  word  does  not  really  contain.  For  example,  strawber- 
ries at  the  end  of  the  season  are  as  scarce  as  at  the  begin- 
ning, but  they  have  less  value  because  they  are  less  desired. 
This  explanation,  moreover,  does  not  satisfy  the  mind  ;  for 
at  first  it  is  difficult  to  understand  the  close  relation  between 
these  two  elements  that  seem  to  have  nothing  in  common  : 
utility  and  scarcity. 

A  more  recent  school  claims  the  merit  of  having  discov- 
ered the  logical  tie  that  binds  these  two  ideas.  It  shows 
that  they  are  related  and  may  be  reconciled  by  means  of  the 
so-called  theory  of  final  utility.  We  shall  explain  later  the 
meaning  of  this  expression.  This  school  of  economists  has 
returned  to  the  idea  of  utility.  Only,  it  has  demonstrated 
that  scarcity,  i.e.  limitation  in  quantity,  far  from  being 
independent  of  utility,  and  artificially  grafted  upon  it  by 
economic  theory,  is  really  inseparable  from  it.  As  mathe- 


UTILITY  55 

maticians  say,  each  is  a  "  function  "  of  the  other  ;  each  has  the 
same  basis,  namely,  the  fact  that  wants  are  limited  in  intensity. 
This  they  prove  by  the  following  demonstration :  — 

When  we  raise  the  old  objection  to  the  utility  theory  that 
water  is  very  useful  and  yet  has  no  value,  what  do  we  mean  ? 
If  we  refer  to  all  the  water  in  existence,  it  is  absolutely  false 
to  maintain  that  it  has  no  value  ;  it  would  possess  a  great 
value  if  it  were  in  any  one's  possession  and  were  put  on 
sale.  If  we  refer  to  the  water  that  happens  to  be  contained 
in  a  particular  glass  or  pail,  we  cannot  say  absolutely  that  it 
is  useless  or  useful,  for  that  depends  on  circumstances. 

Let  us  suppose,  for  example,  that  the  quantity  of  water  at 
my  disposal  is  contained  in  seven  pails.  The  first  of  these 
pails  I  shall  use  to  still  my  thirst,  and  it  is  therefore  very 
useful.  The  second  pail  is  also  useful,  although  less  so, 
because  I  intend  to  use  it  for  cooking.  The  third  is  still 
less  useful,  for  it  serves  only  for  washing.  The  fourth  is  for 
my  horse,  the  fifth  to  water  my  flowers,  and  the  sixth  to  wash 
the  floor  of  iny  kitchen.  The  seventh  pail  is  of  no  use 
whatever  ;  consequently,  I  make  no  effort  to  obtain  it.  If 
some  one  should  insist  on  bringing  me  ten,  twenty,  or  even  a 
hundred  pails  of  water,  these  additional  pails  would  be  a  posi- 
tive nuisance.  Can  we  now  say  that  a  pail  of  water  is  use- 
ful or  that  it  is  useless  ?  These  pails  of  water  represent  a 
long  series  of  varying  utilities,  ranging  from  infinity  to  zero, 
and  falling  even  below  zero.  Yet  every  one  knows  that 
these  pails  all  have  the  same  value.  This  value  is  deter- 
mined by  the  utility  of  one  of  them.  The  question  that 
now  arises  is :  Which  one  determines  the  value  of  the  others  ? 
The  first  ?  Or  the  second  ?  No,  the  last ;  because  the  priva- 
tion only  of  the  last  pail  needed  can  affect  me  at  all.  If 
there  are  a  hundred  pails  at  my  disposal,  and  six  pails  are 
all  I  can  possibly  use,  I  do  not  care  a  whit  for  what  becomes 
of  the  other  ninety-four.  But  if  I  have  only  six  pails  and 
my  reservoir  will  furnish  no  more,  each  of  the  six  pails  has  a 
certain  value.  This  value,  to  be  sure,  cannot  be  greater 


56  PRINCIPLES    OF    POLITICAL   ECONOMY 

than  that  of  the  sixth  pail,  because  only  my  inability  to  use 
this  pail  will  cause  me  any  anxiety.  If  the  first  pail  should 
by  an  accident  be  overturned,  should  I  loudly  lament  its  loss 
and  feel  bound  to  die  of  thirst  ?  Of  course  that  would  be 
absurd.  It  is  evident  that  I  should  not  go  without  drinking- 
water,  but  I  should  be  obliged  to  use  one  of  the  other  pails 
in  place  of  the  missing  one.  Now  which  pail  should  I  sacri- 
fice for  this  purpose  ?  Evidently,  the  one  which  is  least 
useful  to  me,  —  the  sixth.  This  is  why  the  sixth  pail  deter- 
mines the  value  of  the  others. 

Suppose  now  that  my  supply  of  water  is  abundant  enough 
to  furnish  ten  or  even  twenty  pails  of  water.  It  is  then 
clear  that  for  some  of  thes.e  pails  I  shall  have  absolutely  no 
need,  and  their  utility  for  me  is  zero.  At  the  same  time, 
this  circumstance  reduces  the  value  of  all  the  other  pails  to 
zero,  and  this  is  precisely  the  actual  condition  of  things  as 
regards  water  in  most  countries.  This  fact  also  explains 
why,  according  to  this  theory,  value  is  determined  by  final 
utility  or  marginal  utility,  i.e.  the  intensity  of  the  last  want 
satisfied.1 

1  This  theory  may  be  summarized  as  follows  :  — 

Value  is  determined  by  subjective  utility,  which  is  not  the  utility  of  a 
thing  in  general  but  its  utility  for  him  who  possesses  it.  This  utility  is  not 
the  same  for  each  unit  possessed,  but  decreases  as  the  number  of  units  pos- 
sessed increases.  The  utility  of  the  last  unit  possessed,  i.e.  the  least  useful, 
determines  and  limits  the  utility  of  all  the  other  units. 

Final  utility  must  be  distinguished  from  total  utility.  The  latter  consists 
of  the  sum  of  utilities  of  all  the  pails  of  water,  i.e.  of  the  total  of  a  series 
of  decreasing  quantities  ;  it  is  therefore  always  much  greater  than  the  final 
utility.  This  circumstance  explains  why  the  total  utility  of  water  is  enor- 
mous although  the  (final)  utility  of  a  pail  of  water  is  small. 

The  foregoing  is  true  only  of  water  for  household  purposes.  If  water  is 
used  for  irrigation  or  for  motive  power,  it  acquires  a  value  —  and  a  consider- 
able one  —  because  for  such  purposes  as  this  it  does  not  exist  in  sufficient 
quantity  to  satisfy  the  needs  of  all ;  and  in  this  event  the  thousandth  pail  or 
the  ten-thousandth  pail  would  still  have  a  (final)  utility  and  confer  a  value 
on  the  whole  quantity. 

In  his  excellent  book,  now  unfortunately  forgotten,  on  "  Le  Commerce  et  le 
Gouvernement,"  the  philosopher  Condillac  foreshadowed  this  explanation  of 
value  and  in  this  respect  was  more  advanced  than  his  contemporaries,  the 


UTILITY  57 

This  theory  is  evidently  founded  on  the  law  that  we  have 
already  stated,  viz.,  that  the  wants  of  man  are  limited  in  in- 
tensity. It  is  admirable  as  a  correct  and  delicate  psycho- 
logical analysis  of  human  desires ;  but  in  basing  value  on  a 
single  principle  it  does  not  appear  to  have  succeeded  any 
better  than  preceding  theories.  What  the  theory  designates 
as  final  utility  is  nothing  else  than  what  we  have  called  the 
degree  of  desirability,  i.e.  the  sum  of  those  elements  that 
constitute  economic  desire.1 

Among  these  elements  there  is  especially  one  that  cannot  be 
brought  into  the  formulae  of  this  theory,  viz.,  limitation  of  the 
quantity.  This  point  is,  to  be  sure,  implied  in  the  theory  by 
regarding  the  final  utility  —  in  mathematical  language  —  as  a 
"  function  "  of  the  quantity.  But  in  this  event  we  must  admit 
that  the  "  quantity  "  is  in  turn  determined  by  other  causes 
more  fundamental.  If  we  lived  in  a  world  where  production 

physiocrats:  "The  value  of  things  grows  by  scarcity,  and  diminishes  by 
abundance.  Abundance  may  reduce  it  to  zero.  A  superabundance  of  goods 
is  always  valueless  when  we  cannot  make  use  of  the  surplus,  for  then  it  is 
entirely  useless."  Franklin  put  this  even  more  tersely,  "  When  the  well  is 
dry  we  know  the  value  of  water." 

1  The  celebrated  theory  of  final  utility  outlined  above  owes  its  wide  ac- 
ceptance primarily  to  the  works  of  three  economists  who  published  it  almost 
simultaneously  about  thirty  years  ago  :  Professor  Jevons  in  England,  Walras 
in  Switzerland,  and  Karl  Menger  in  Austria.  Jevons  outlined  the  doctrine  in 
his  "  Theory  of  Political  Economy,"  published  in  1871,  and  at  almost  the 
same  time  the  same  doctrine  was  expounded  in  French  and  German  by  the 
other  two  authors.  There  is  no  reason  to  believe  that  any  one  of  these  three 
scientists  knew  anything  of  the  others'  work.  Each  of  them  regarded  his  expo- 
sition of  the  theoiy  as  the  first  and  only  one.  A  few  years  later,  however,  it 
was  discovered  that  an  obscure  German  author  named  Gossen  had  in  1854  for- 
mulated the  same  doctrine  of  marginal  utility.  Still  later  it  was  maintained 
that  the  French  economist  and  engineer  Dupuit  developed  the  same  theory  in 
1844.  The  honor  of  its  invention  has  recently  been  restored  to  the  Germans 
in  an  essay  by  C.  W.  A.  Veditz  on  «  Thuenen's  Wertlehre"  (Halle,  1896),  in 
which  the  author  shows  that  the  final  utility  theory  was  clearly  foreshadowed, 
if  not  explicitly  stated,  by  the  German  economist  von  Thuenen,  who  wrote  in 
1826.  In  the  United  States  the  principal  protagonists  of  this  theory  are 
Professor  J.  B.  Clark  and  Professor  S.  N.  Patten.  Its  principal  advocates 
abroad  are  Boehm-Bawerk  and  Wieser. 


58  PRINCIPLES   OF   POLITICAL   ECONOMY 

did  not  exist ;  if,  for  instance,  all  the  objects  that  serve  our 
wants  fell  from  heaven  like  the  manna  of  the  Jews,  then  the 
supply  of  goods  would  be  a  fixed  and  unchangeable  quantity 
in  the  problem  of  value.  But  this  is  not  true.  Supply  is 
alterable,  and  therefore  of  only  relative  importance.  There 
is  not  a  thing  in  the  world,  even  among  the  products  of  nature, 
and  certainly  not  among  the  products  of  human  industry,  the 
supply  of  which  is  so  rigorously  fixed  that  we  cannot  increase 
it  by  additional  effort.  When  we  say  that  diamonds  are  rare 
we  do  not  mean  that  nature  has  put  a  specific  number  of  them 
into  commerce  and  then  destroyed  the  means  of  their  pro- 
duction ;  we  simply  mean  that  it  requires  much  effort  or 
great  good  fortune  to  find  them,  and  that  consequently  the 
number  of  diamonds  can  be  increased  only  with  difficulty. 
When  we  say  that  chronometers  are  rare  we  do  not  mean 
that  there  is  in  the  world  only  a  fixed  number  of  them;  for 
we  might  produce  almost  any  number.  But  as  the  manufac- 
ture of  a  good  chronometer  requires  considerable  time  and  a 
special  kind  of  craftsmanship,  the  quantity  is  limited  by  the 
available  time  and  labor.  It  would  be  unsafe,  even,  to  affirm 
that  the  number  of  paintings  by  Raphael  is  absolutely  fixed  ; 
for  it  is  not  impossible  that  some  day  we  may  discover,  hidden 
away  in  some  old  attic  or  church,  hitherto  unknown  works  of 
this  artist. 

In  forming  a  concept  of  value,  therefore,  we  cannot  neglect 
to  consider  the  means  of  increasing  the  quantity  of  a  given 
kind  of  wealth.  There  are  even  cases  when  the  mere  possibility 
of  voluntarily  increasing  the  quantity  is  sufficient  to  diminish 
desire  and  reduce  value.  Such  a  case  would  be,  for  example, 
the  discovery  of  a  method  for  crystallizing  carbon  to  produce 
diamonds  ;  even  before  the  industrial  application  of  this 
method  the  value  of  diamonds  would  fall. 

Finally,  this  theory,  which  explains  facts  very  well  Avhen 
we  have  to  do  with  isolated  man  (like  Robinson  Crusoe),  does 
not  explain  them  when  we  enter  the  real  world  of  exchange, 
except  by  means  of  complicated  abstractions.  Indeed,  as 


LABOR  59 

values  are  entirely  subjective,  a  given  object  has  as  many 
values  as  there  are  buyers  and  sellers  in  the  market.  We 
must  therefore  still  ask  :  How  is  a  uniform  market  price 
evolved  from  this  great  variety  of  values  ?  (See  Book  III, 
the  section  on  Exchange  Value.) 

SECTION  2.     LABOR 

The  second  theory  is  in  a  manner  the  inverse  of  the  first. 
While  the  first  clings  to  the  idea  of  the  gratification  afforded 
by  goods,  the  second  emphasizes  that  of  the  effort  made  to 
get  them.  It  occupies  an  important  place  in  the  science  of 
economics.  First  developed  by  Adam  Smith,  vigorously 
expounded  by  Ricardo,  it  has  been  accepted  by  economists 
belonging  to  many  different  schools  —  from  the  optimists 
like  Bastiat  to  the  socialists  like  Karl  Marx.1 

Of  course  this  theory  does  not  deny  that  utility,  i.e.  the 
power  to  satisfy  want  or  desire,  is  the  fundamental  condition, 
the  sine  qua  non  of  value.  It  would  indeed  be  foolish  to  sup- 
pose that  a  useless  thing  can  have  any  value,  whatever  may 
be  the  labor  that  it  has  cost.  But,  according  to  this  school, 
although  utility  is  the  condition  of  value,  it  is  not  the  cause 
of  value.  The  basis  of  value,  it'is  claimed  by  this  school,  is 
human  labor  ;  and  things  are  worth  more  or  less  according 
to  the  amount  of  labor  required  to  produce  them. 

This  theory  seems  to  possess  two  advantages  over  the  pre- 

1  "  It  is  natural,"  says  Adam  Smith,  "  that  what  is  usually  the  produce  of 
two  days'  or  two  hours'  labor  should  be  worth  double  what  is  usually  the 
produce  of  one  day's  or  one  hour's  labor." — "  Wealth  of  Nations,"  Book  I, 
Chapter  VI. 

Ricardo  speaks  of  labor  *«  as  being  the  foundation  of  all  value,  and  the 
relative  quantity  of  labor  as  almost  exclusively  determining  the  relative 
value  of  commodities."  —  Chapter  I,  Section  2,  "Principles  of  Political  Econ- 
omy and  Taxation." 

"  The  value  of  a  commodity  is  determined  by  the  quantity  of  labor 
expended  during  its  production."  —  KARL  MARX,  "Capital,"  Chapter  I. 

Despite  this  apparent  identity  in  the  thought  of  these  three  writers  regard- 
ing value,  their  explanations  of  it  are  at  bottom  quite  different.  But  we 
cannot  here  discuss  this  difference. 


60  PRINCIPLES    OF   POLITICAL   ECONOMY 

ceding  one  :  (1)  That  of  being  more  scientific,  because  it 
gives  as  the  basis  of  value  a  precise  quantitative  notion, — 
something  that  can  be  measured.  To  say  that  a  certain 
watch  has  twice  the  value  of  another  because  it  represents 
twice  as  much  labor,  satisfies  our  mind  ;  the  explanation 
seems  to  be  valid  ;  at  all  events  we  can  verify  it  if  we  choose. 
But  to  say  that  it  is  worth  twice  as  much  because  it  is  twice 
as  much  desired,  does  not  sound  clear  and  convincing  ;  for 
what  do  we  know  about  it,  and  how  can  we  tell  ?  (2)  It 
also  satisfies  better  the  idea  of  justice,  because  it  gives  as  the 
basis  of  value  a  human  element, — labor.  This  is  one  reason 
why  the  theory  has  attracted  so  many  generous-minded  men. 
If  we  could  succeed  in  showing  that  the  value  of  all  things 
that  have  become  some  one's  property,  beginning  with  the 
soil  itself,  is  directly  proportionate  to  the  labor  that  they 
have  cost,  it  would  not  necessarily  follow  that  the  wealth 
belonging  to  each  person  is  equivalent  to  the  product  of  his 
labor1  (for  he  may  have  appropriated  value  created  by  the 
labor  of  others),  but  the  problem  of  attributing  to  each  per- 
son a  value  equal  to  the  product  of  his  labor  would  at  least 
be  very  much  simplified  ;  it  would,  upon  such  a  theory  as 
this,  be  easier  to  found  our  social  organization  on  a  principle 
of  justice. 

We  wish,  therefore,  that  this  theory  could  in  truth  be 
regarded  as  the  expression  of  existing  conditions.  Unfor- 
tunately, the  explanation  is  unsatisfactory,  for  the  following 
reasons  :  — 

(1)  If  the  cause  or  essence  of  the  value  of  a  thing  con- 
sisted in  the  labor  requisite  for  its  production,  then  value 
would  necessarily  be  unchangeable,  for  as  Bastiat  himself 

1  The  optimistic  school  of  economists  actually  affirms  that  wealth  is  propor- 
tionate to  labor,  and  endeavors  to  show  that  except  for  those  perturbations, 
exploitations,  and  thefts  that  occur  even  in  the  most  civilized  societies,  the 
sum  of  values  in  any  person's  possession  is  the  fruit  of  his  labor  and  saving, 
or  of  his  ancestors'  labor  and  saving. 

The  socialists,  particularly  Karl  Marx,  claim  that  all  wealth,  all  capital,  is 
the  result  of  a  deduction  from  the  product  of  the  labor  of  others. 


LABOR  61 

admitted,  "past  labor  is  not  susceptible  of  a  more  or  less." 
But  every  one  knows  that  the  value  of  objects  varies  con- 
stantly. It  is  evident  that  these  variations  are  absolutely 
independent  of  the  work  of  production.  Besides,  it  is  a  priori 
absurd  to  think  that  the  value  of  a  commodity  may  thus  de- 
pend on  a  fact  that  is  irrevocably  past.  The  labor  put  into 
an  object  is  a  matter  of  the  past,  and  cannot  now  be  changed. 
"What's  done,  is  done." 

To  this,  of  course,  the  reply  may  be  made  that  we  should 
consider  not  past  labor  but  present  labor,  —  not  the  amount 
of  labor  especially  devoted  to  the  particular  object  that 
we  have  in  mind,  but  the  generic  labor  necessary  under 
existing  social  conditions  to  produce  an  object  like  it.1  This 
may  be  well  and  true,  but  there  remain  other  objections  more 
difficult  to  remove. 

(2)  If  labor  were  the  cause  of  value,  equal  labors  would 
always  correspond  to  equal  values,  and  unequal  values  to  un- 
equal labor.  But  we  constantly  see  objects  that  have  cost 

1  The  American  economist,  Henry  C.  Carey,  maintained  that  the  cost  of 
"reproduction"  determines  value.  He  meant  that  the  actual  amount  of 
labor  expended  in  making  a  chair,  for  example,  does  not  determine  its  value, 
but  the  amount  of  labor  that  would  now  be  required  to  make  another  chair 
just  like  it,  i.e.  the  cost  of  again  producing  such  a  chair. 

Karl  Marx  declared  that  we  need  not  care  for  the  individual  labor  which 
may  have  been  employed  in  producing  a  given  object,  but  for  the  social  labor 
requisite  for  the  production  of  that  object,  measured  by  the  number  of  hours 
necessary,  on  the  average,  to  produce  it. 

Bastiat,  to  solve  the  same  difficulty,  says  that  we  must  Consider,  not  the 
labor  performed  by  him  who  produced  the  object,  but  only  the  labor  saved 
to  him  who  seeks  to  possess  it.  And  as  helping  some  one  to  avoid  labor  is, 
according  to  Bastiat,  to  "  render  him  a  service,"  this  author  defines  value  as 
"the  relation  between  two  services  exchanged,"  and  declares  that  the  cause 
and  measure  of  value  is  the  service  rendered.  This  idea,  by  which  social 
relations  are  regarded  as  an  exchange  of  services,  is  both  very  ingenious  and 
very  modern,  but  as  an  explanation  of  value  it  amounts  to  mere  tautology. 
To  the  question,  Why  is  a  diamond  more  valuable  than  a  pebble  ?  it  replies. 
Because  in  giving  me  a  diamond  you  render  me  a  greater  service  than  in  giv- 
ing me  a  pebble.  No  one  would  gainsay  so  puerile  a  proposition  ;  but  it  is 
sufficient  to  reply  that  if  the  service  rendered  by  the  transfer  of  a  diamond 
is  greater  than  that  rendered  by  giving  up  a  pebble,  this  is  simply  because 


62  PRINCIPLES   OF  POLITICAL  ECONOMY 

the  same  amount  of  labor  selling  at  different  prices:  for 
example,  two  pieces  of  meat  from  different  parts  of  the  same 
cow.  On  the  other  hand,  objects  which  have  cost  different 
amounts  of  labor  are  sold  at  the  same  price  :  for  example, 
a  bushel  of  wheat  from  land  that  produces  ten  bushels  an 
acre,  and  a  bushel  of  the  same  quality  from  land  that  pro- 
duces thirty  an  acre. 

The  phenomenon  known  to  political  economists  by  the 
name  of  rent  is  nothing  else  than  the  excess  of  the  selling 
price  of  an  article  over  its  cost  of  production,  i.e.  its  cost  in 
labor.  Now  rent  exists  everywhere,  more  or  less.1 

(3)  If  labor  were  the  cause  of  value,  value  would  be 
absent  where  labor  is  absent.  But  there  are  innumerable 
things  that  have  a  value  of  their  own  without  the  interven- 
tion of  labor,  e.g.  springs  of  mineral  water  or  of  petroleum, 
guano  deposited  by  sea-fowl,  sandy  beaches  that  are  particu- 
larly valuable  for  planting  vineyards,  building  lots  on  the 
prominent  streets  of  large  cities,  etc.2  There  are  also  things 
that  acquire  an  increased  value  without  the  addition  of  any 
labor,  e.g.  wine  that  has  been  stored  in  wine-cellars. 

the  diamond  has  more  value  than  the  pebble.  Thus  we  have  reasoned  in  a 
circle.  As  a  matter  of  fact,  it  is  not  the  service  rendered  by  him  who  yields 
an  object,  that  determines  its  value,  but,  on  the  contrary,  it  is  the  value  of 
the  object  yielded,  that  determines  and  measures  the  service  rendered. 

It  should  be  noted  that  to  the  very  extent  that  these  amendments  correct 
the  fundamental  " labor"  theory,  they  also  deprive  it  of  the  merit  of  satisfy- 
ing our  ideal  of  justice.  The  theory  of  value  and  our  ideal  of  justice  would  be 
in  perfect  harmony  if  we  could  prove  that  the  value  of  any  object  in  a  per- 
son's possession  is  proportionate  to  the  trouble  that  was  required  of  its  pos- 
sessor to  produce  it.  But  this  harmony  no  longer  exists  if  we  limit  ourselves, 
like  Bastiat,  to  proving  that  value  is  simply  proportionate  to  the  trouble 
saved  (i.e.  not  incurred},  or  if,  like  Karl  Marx,  we  measure  value  by  average 
labor  (which  is  independent  of  individual  labor). 

1  Ricardo  did  not  deny  rent.     It  was  he  who  discovered  it  for  land.     The 
explanation  he  gives  of  it  serves  but  to  emphasize  the  fact  that  two  objects  of 
the  same  quality,  i.e.  the  same  utility,  have  necessarily  the  same  value  how- 
ever unequal  may  be  the  labor  they  have  cost. 

2  Ricardo  did  not  deny  the  indubitable  fact  that  there  are  objects  "  whose 
value  depends  only  on  scarcity,  because  no  labor  can  increase  their  quantity." 


LABOR  63 

(4)  Finally,  and  above  all,  if  labor  is  the  cause  of  value, 
what  is  then  the  cause  of  the  value  of  labor  itself?  For  labor 
has  an  incontestable  value  ;  it  is  bought  and  sold,  or  rather, 
it  is  hired  every  day  at  a  certain  price.  It  is  easy  to  explain 
the  value  of  labor  by  the  value  of  its  product,  just  as  the 
value  of  a  farm  is  determined  by  the  value  of  its  crops.  But 
if  in  turn  we  pretend  to  explain  the  value  of  a  product  by 
the  value  of  the  labor  which  produced  it,  we  are  reasoning 
in  a  circle. 

The  above  theories  are  the  two  important  explanations  of 
economic  value.  We  must  choose  between  them,  —  unless 
we  care  to  adopt  them  both.  Indeed,  I  believe  that  this  is 
just  what  we  are  obliged  to  do,  not  for  the  sake  of  eclecti- 
cism, but  because  we  thus  approach  nearer  to  the  truth. 
The  human  mind  is  naturally  disposed  to  seek  a  single  cause 
for  the  phenomena  under  study;  but  is  it  not  reasonable 
to  suppose  that  value  has  two  sides,  two  poles  as  it  were,  each 
of  which  contains  a  part  of  the  truth  —  utility  as  well  as 
labor,  pleasure  as  well  as  pain  ? 

Let  us  ask  ourselves  these  questions: — Why  do  we  attrib- 
ute a  certain  value  to  a  given  object  ?  Why  do  we  want  a 
given  object?  A  little  reflection  will  suffice  to  show  that  two 
different,  and  in  a  sense  opposite,  answers  may  be  given  to 
these  questions.  We  may  place  a  value  upon  things  because 
they  afford  us  pleasure,  or  we  may  do  so  because  they  have 
cost  us  some  expenditure  of  effort  or  pains.  Even  an  isolated 
man  like  Robinson  Crusoe  certainly  did  not  classify  the 
objects  he  possessed  solely  according  to  the  satisfaction 
he  anticipated  from  their  possession.  He  had  also  another 
criterion  of  value,  viz.,  the  difficulty  he  would  encounter  in 
replacing  these  objects.  Probably  the  utility  of  his  watch 

But  he  considered  them  insignificant  exceptions  to  the  rule,  and  gave  as 
typical  examples :  valuable  paintings  and  statues.  The  objects,  however, 
which  have  a  scarcity-value  constitute  a  class  of  exceptions  that  is  more 
important  than  the  rule. 


64  PRINCIPLES   OP  POLITICAL  ECONOMY 

was  small,  for  as  he  lived  alone  and  had  no  engagements  to 
fulfil  he  needed  it  little  ;  but  as  he  knew  that  it  would 
be  impossible  for  him  to  replace  it,  he  doubtless  attributed  a 
greater  value  to  it  than  it  would  otherwise  have  possessed. 
There  is  consequently  all  the  more  reason  why  we,  who  are 
living  in  a  society  and  who  are  interested  in  values  princi- 
pally for  purposes  of  exchange,  cannot  ignore  this  matter  of 
pain  or  cost.  As  sellers  we  must  think  of  the  difficulty 
of  replacing  the  object  that  we  relinquish.  As  purchasers 
we  are  concerned  with  the  difficulty  of  procuring  the  object 
that  we  want.1 

In  summarizing  our  answer  to  the  question,  What  is  the 
cause  of  value  ?  we  cannot  assign  one  exclusive  cause,  for 
there  are  more  than  one  ;  but  we  may  say  :  — 

Things  have  more  or  less  value  according  to  the  intensity  of 
our  desire  for  them. 

The  intensity  of  our  desire  for  things  varies  according  to  the 
insufficiency  of  their  quantity  for  the  satisfaction  of  our  wants. 

The  quantity  of  things  is  more  or  less  insufficient,  according 
to  the  difficulty  we  experience  in  increasing  it. 

IX.   What  is  Price? 

To  obtain  a  definite  idea  of  the  size,  the  weight,  or  the 
value  of  things,  it  is  not  sufficient  to  compare  them  with 
one  another. ,  A  common  measure  is  necessary.  For  meas- 
uring lengths  the  term  of  comparison  was  originally  a  part 
of  the  body  (foot,  ell,  etc.),  and  is  now,  according  to  the 
"metric  system"  introduced  first  in  France,  a  part  of  the 
earth's  circumference  (the  meter,  kilometer,  etc.).  For 
measuring  weights  the  term  of  comparison  chosen  in  the 

1  Professor  Marshall  declares  that  value  is  determined  both  by  the  final 
utility  and  by  the  cost  of  production;  value  " maintains  an  equilibrium 
between  these  two  opposite  forces,  like  the  keystone  of  an  arch." 

Euskin  says  that  value  is  the  product  of  two  factors,  one  of  which  is  labor, 
as,  and  the  other  the  demand,  y.  Whence,  if  x  or  y  equals  0,  then  the  value, 
xy,  also  equals  0.  ( "  Unto  This  Last. ' ' ) 


WHAT    IS    PRICE?  65 

metric  system  is  the  weight  of  a  fixed  volume  of  distilled 
water.  The  old  or  original  English  pound  was  derived 
from  the  weight  of  7680  grains  of  wheat,  all  taken  from  the 
middle  of  the  ears  and  well  dried  ;  hence  "  grains  "  form  the 
lowest  fractional  parts  of  a  pound.  The  standard  British 
pound  at  present  is  a  piece  of  platinum  preserved  in  the 
office  of  the  Exchequer,  at  the  temperature  of  62°  Fahr.  A 
number  of  authorized  copies  of  it  have  been  made  and  de- 
posited at  several  institutions.  The  yard,  as  the  standard 
English  measure  of  length,  is  the  distance  between  two 
marks  on  a  metal  rod  imbedded  in  the  masonry  of  the 
Houses  of  Parliament. 

A  common  measure  enables  us  to  compare  two  things  in 
different  places  (which  cannot  be  brought  together  for  direct 
comparison),  or  to  compare  the  same  thing  at  different  times 
in  order  to  ascertain  what  changes  have  taken  place  in  it. 
By  means  of  the  yard-measure  we  can  compare  the  stature 
of  the  Lapps  with  that  of  the  Patagonians,  and  tell  exactly 
how  much  taller  the  former  are  than  the  latter.  The  same 
standard  of  comparison,  if  it  has  not  been  entirely  forgotten, 
in  a  thousand  years  will  enable  our  descendants  to  compare 
themselves  with  the  man  of  to-day  and  ascertain  whether  or 
not  mankind  has  decreased  in  stature. 

In  order  to  measure  value  it  is  not  sufficient  for  us  to  com- 
pare two  values  one  with  another  (as  is  done  in  barter),  but 
we  must  take  the  value  of  some  definite  object  as  a  basis  of 
comparison.  But  which  object  shall  we  choose  ?  Each 
nation  and  every  period  seems  to  have  had  its  own  measure 
of  value.  Homer  declared  that  the  armor  of  Diomedes  was 
worth  a  hundred  oxen.  Until  a  few  years  ago,  a  Japanese 
would  have  said  that  it  was  worth  so  many  hundredweight 
of  rice.  An  African  negro  would  have  put  its  value  in 
yards  of  colored  calico,  and  a  Canadian  trapper  would  have 
expressed  it  in  fox-skins  or  otter-skins.  It  is,  nevertheless, 
a  remarkable  fact  that  almost  all  civilized  people  have  agreed 
in  choosing  as  their  measure  of  values,  as  their  standard,  the 


66  PRINCIPLES    OF    POLITICAL    ECONOMY 

value  of  the  precious  metals,  gold,  silver,  and  copper,  but 
especially  the  first  two.  They  all  use  a  little  ingot  of  gold 
or  silver,  called  a  dollar,  or  pound,  or  franc,  or  rouble.  To 
measure  the  value  of  any  object,  they  compare  it  with  the 
value  of  that  small  weight  of  gold  or  silver  that  serves  as  the 
monetary  unit  ;  that  is  to  say,  they  try  to  find  how  many 
of  these  bits  of  metal  must  be  given  up  for  the  commodity 
in  question.  If,  for  instance,  ten  are  needed,  they  say  that 
the  commodity  is  worth  ten  dollars,  or  ten  pounds,  etc. 
That  is  its  price. 

The  price  of  a  thing  is,  therefore,  the  expression  of  the 
relation  between  the  value  of  the  thing  and  the  value  of  a 
certain  weight  of  gold  or  silver  ;  or,  to  put  it  more  briefly, 
it  is  its  value  expressed  in  money.  As  in  all  civilized  coun- 
tries money  is  the  sole  customary  measure  of  values,  the 
term  "price"  has  come  to  be  synonymous  with  "value." 

Why  have  the  precious  metals  been  chosen  as  the  common 
measure  of  values  ?  Because  they  possess  two  properties 
that  enable  them  to  fulfil  this  function  admirably,  or,  at  all 
events,  better  than  any  other  known  object.  These  two 
properties  are  :  (1)  Great  value  in  small  bulk,  which  makes 
them  very  easily  transportable  ;  (2)  A  degree  of  chemical  un- 
changeableness  that  guarantees  almost  unlimited  durability. 
By  virtue  of  the  first  of  these  properties  the  value  of  precious 
metals  is  of  all  values  that  which  varies  least  from  one  place 
to  another.  By  virtue  of  the  second  quality  the  value  of 
these  metals  varies  least  from  one  year  to  another.  This 
double  invariability,  relatively  speaking,  in  time  and  in 
space,  is  the  essential  condition  of  every  good  measure.  Yet 
we  shall  see  (in  the  section  on  Money)  that  when  we  take 
long  periods  of  time  into  consideration  —  not  centuries,  but 
even  generations  —  this  chosen  measure  is  found  to  be  very 
defective.  Can  we  find  a  better  one  ?  Several  have  been 
proposed,  the  principal  one  being  wheat.  This  seems  a  most 
astounding  choice  ;  for  if  we  consider  the  value  of  this  com- 
modity in  different  places  or  at  different  times  we  find  that 


WHAT   IS    PRICE  ?  67 

there  are  few  goods  whose  variations  in  value  are  more 
marked.  At  a  given  time  a  bushel  of  wheat  may  sell  for 
$2  in  France,  $  1  in  London,  and  50  cents  in  one  of  our 
western  states  ;  and  from  year  to  year  the  value  of  crops 
varies  greatly,  according  as  they  are  good  or  bad. 

To  this  the  reply  is  made  that  though  the  value  of  wheat 
is  incomparably  more  variable  than  that  of  the  precious 
metals  when  only  short  spaces  of  time  are  considered,  yet  it 
is  far  more  stable  when  longer  periods  are  observed.  Wheat 
satisfies  a  physiological  need  that  is  permanent  and  varies 
little.  No  other  commodity  (at  least  in  civilized  societies) 
possesses  to  the  same  degree  the  double  characteristic  of 
being  almost  indispensable  up  to  a  certain  limit,  determined 
by  the  quantity  necessary  to  nourish  a  person,  and  of  being 
almost  entirely  useless  beyond  this  limit,  —  since  no  one 
cares  to  consume  more  than  his  hunger  demands.  Hence, 
despite  the  sudden  and  wide  oscillations  in  its  production, 
the  law  of  demand  and  supply  tends  always  to  restore  its 
value  to  a  level  determined  by  physiological  need  ;  it  does 
this,  moreover,  with  greater  effectiveness  whenever  pro- 
duction has  temporarily  deviated  from  its  proper  level. 

It  must  be  acknowledged  that  wheat  does  offer,  so  far  as 
variations  in  value  are  concerned,  virtues  and  defects  that 
are  precisely  the  opposite  of  those  which  mark  the  precious 
metals.  For  this  reason  it  has  often  been  used  by  statisti- 
cians as  a  good  basis  on  which  to  estimate  the  cost  of  living 
at  various  periods. 

A  better  measure,  it  appears,  would  be  labor.  In  fact  it 
may  be  maintained  that  men  will  be  willing  to  devote  more 
labor  to  making  a  thing  when  the  thing  is  greatly  desired, 
or,  in  other  words,  when  they  believe  it  to  possess  greater 
value.  Just  as  in  exchange  we  measure  the  value  of  a  com- 
modity by  the  sacrifice  of  some  other  commodity  which  some 
one  is  disposed  to  make  in  order  to  procure  it  (for  instance, 
by  the  amount  of  money  which  the  purchaser  will  yield  for 
it ) ;  similarly,  may  we  not  measure  its  value  by  the  amount 


68  PRINCIPLES    OF   POLITICAL   ECONOMY 

of  time  and  trouble  which  men  will  devote  to  its  produc- 
tion ?  It  is  in  this  sense  that  Adam  Smith  said,  "  Labor 
was  the  first  price,  the  original  purchase-money  that  way 
paid  for  all  things."  l 

What  we  really  want  to  find  is  a  practical  and  convenient 
measure.  How,  then,  can  we  take  labor  as  a  measure,  since 
it  is  never  the  same  for  two  persons,  and  varies  continually 
in  intensity  and  in  quality  ? 

It  has  also  been  suggested  to  take,  as  the  common  measure 
of  value,  the  wages  of  a  workman  of  the  lowest  class,  —  of  a 
manual  laborer  who  earns  just  enough  to  live.  This  meas- 
ure is  proposed  on  the  supposition  that  the  amount  neces- 
sary to  keep  a  man  alive  is  a  fixed,  definite  quantity.  But 
we  need  only  refer  to  what  has  been  said  concerning  the 
wants  of  man  to  be  convinced  that  this  supposition  is  en- 
tirely contrary  to  facts. 

Hence  we  conclude  that,  for  want  of  something  better,  we 
must  be  satisfied  to  use  gold  and  silver  as  the  measure  of 
value,  and  to  express  prices  in  money. 

1  This  theory  must  not  be  confounded  with  that  of  Karl  Marx,  by  which 
labor  is  regarded  as  the  cause  of  value,  —  a  doctrine  which  we  have  already 
rejected.  Here  we  are  considering  labor  not  as  the  cause  but  as  the  effect  of 
value,  or  rather  as  the  effect  of  desire,  since  desire  gives  rise  to  value.  If 
we  admit  that  labor  is  an  effect  of  value,  nothing  would  be  more  scientific 
than  to  measure  the  cause  by  the  effect.  We  measure  weight  by  the  pen- 
dulum much  better  than  with  scales,  for  scales  permit  us  only  to  compare 
weights  —  as  exchange  enables  us  to  compare  only  values  —  while  the  pendu- 
lum measures  the  intensity  of  weight  itself.  If  we  could  measure  value  by 
labor,  we  should  then  be  able  to  tell  whether  in  a  few  centuries  the  economic 
desires  of  mankind  are  more  er  less  intense  than  to-day. 


BOOK  II.    PRODUCTION 


PART  I.  THE  FACTORS  OF  PRODUCTION 

THANKS  to  a  tradition  dating  from  the  time  of  the  first 
economists,  three  agents  of  production  have  always  been  dis- 
tinguished: land,  labor,  and  capital.  This  threefold  division 
has  the  advantage  of  simplicity,  and  there  seems  to  be  no 
need  to  abandon  it,  —  at  least  not  in  an  elementary  book  like 
this. 

It  requires,  however,  some  correction.  Classical  political 
economy  has  always  shown  an  unfortunate  tendency  to  re- 
gard these  three  factors  as  equally  important.  This  ten- 
dency was  doubtless  due  to  a  desire  to  justify  the  claims  of 
each  in  the  ultimate  distribution  of  products,  by  attributing 
ivages  to  the  laborer,  rent  to  the  owner  of  land,  and  profit  to 
the  owner  of  capital.  But  we  must  abandon  any  such  effort 
as  unscientific.  Here  we  have  to  do  only  with  production, 
and  from  this  point  of  view  it  is  at  once  evident  that  these 
three  factors  play  unequal  parts.  Of  the  three,  labor  is  the 
only  one  that  can  claim  to  be  an  agent  of  production  in  the 
exact  sense  of  the  word.  Only  man  plays  an  active  part  in 
production  ;  nature  is  absolutely  passive,  and  merely  obeys 
man,  often  after  long  resistance.  Nevertheless,  whenever 
we  have  to  do  with  material  wealth,  nature  is  indispensable 
to  production.1  It  may  be  called,  therefore,  a  factor  of  pro- 

1  When  we  are  considering  non-material  products,  or  services  (see  p.  48), 
it  is  plain  that  human  labor  is  sufficient,  —  unless  we  maintain,  with  a  cer- 
tain degree  of  subtilty,  that  these  services  can  be  transmitted  only  through 
the  medium  of  natural  agents  ;  the  song  of  a  singer,  the  advice  of  a  physician, 
can,  to  be  sure,  reach  our  ears  only  by  means  of  sonorous  air  vibrations. 

69 


70  PRINCIPLES    OF    POLITICAL   ECONOMY 

duction,  for  it  is  not  only  a  necessary  concomitant  of  labor, 
but  must  exist  before  labor.  The  activity  of  man  ac- 
complishes nothing  in  a  vacuum  ;  it  does  not  really  create, 
but  must  find  in  the  outside  world  those  indispensable  ma- 
terials on  which  it  operates.  These  materials  are  furnished 
by  nature.  The  third  factor,  capital,  also  plays  a  purely 
passive  part,  and  therefore  should  not  be  called  a  productive 
agent.  It  is  not  even  a  primary  factor  of  production ;  it  is 
only  a  factor  of  secondary  importance.  Logically,  as  well  as 
chronologically,  it  is  derived  from  the  two  others.  Capital, 
as  we  shall  explain  in  detail  later,  is  a  product  of  labor  and 
of  nature,  set  aside  for  productive  purposes.  Its  right  name 
is  "instrument"  of  production,  in  the  wide  sense  of  the 
term.1 

1  The  classical  economists  generally  designated  as  profits  the  share  of  the 
capitalist  in  the  distribution  of  goods.  But  modern  economists  have  confined 
this  term  to  the  remuneration  received  by  the  industrial  projector,  and  have 
used  the  term  interest  to  designate  the  share  due  to  capital.  It  is  the  indus- 
trial projector  who  directs  production  by  uniting  the  requisite  land,  labor, 
and  capital ;  it  is  he,  moreover,  who  is  directly  responsible  for  the  outcome. 
(See  the  Chapter  on  Profits.) 


CHAPTER   I— LABOR 

t 

I.   On  the  Part  played  by  Labor  in  Production 

To  accomplish  its  purposes,  and  principally  to  obtain  the 
necessities  of  existence,  every  organism  must  perform  work. 
The  seed  must  work  its  way  through  the  hardened  crust  of 
earth.  The  oyster,  clinging  to  its  bed,  opens  and  closes  its 
shell  to  draw  nourishment  from  the  water.  The  spider  spins 
its  web  ;  the  wolf  hunts  its  prey.  Nor  is  man  exempt  from 
this  universal  law ;  he  too  has  to  toil  to  satisfy  his  wants. 
With  plants  this  toil  or  striving  is  unconscious  ;  with  ani- 
mals it  is  instinctive  ;  with  man  it  is  a  voluntary,  conscious 
act,  called  labor. 

But  is  there  not  some  wealth  that  man  can  obtain  without 
work,  —  wealth  that  nature  lavishly  bestows  on  him  ?  This 
is  a  difficult  question.  First  of  all  it  must  be  observed  that 
there  is  not  a  single  object  among  those  that  are  called  prod- 
ucts that  does  not  in  some  measure  presuppose  the  inter- 
vention of  labor.  The  word  product  (productum),  which 
means  "  drawn  from  somewhere,"  implies  this.  But  what, 
except  the  hand  of  man,  could  have  performed  this  draw- 
ing or  producing  ?  Even  the  fruits  which  nature  has  given 
man,  he  must  take  the  trouble  to  gather.  This  is  labor, 
and  under  some  circumstances  exceedingly  arduous  labor. 

People  seldom  realize  what  an  important  part  labor  plays 
even  in  those  products  that  are  often  inaccurately  termed 
"natural."  They  are  too  ready  to  believe  that  everything 
that  grows  on  the  earth  is  due  to  the  generosity  of  nature. 
As  a  matter  of  fact,  nearly  all  the  plants  that  supply  man 
with  food  have  been  so  modified  by  cultivation  and  by  the 
labor  of  hundreds  of  generations,  that  botanists  can  seldom 

71 


72  PRINCIPLES    OF    POLITICAL    ECONOMY 

discover  their  original  types.  Wheat,  maize,  and  beans  have 
been  found  nowhere  in  the  wild  state.  Even  such  plants 
as  do  grow  wild  are  wonderfully  different  from  their  culti- 
vated congeners.  Between  the  acid  berries  of  the  wild  vine 
and  our  grapes,  between  the  succulent  fruits  of  our  gardens 
and  the  bitter  or  even  poisonous  wild-fruit,  there  is  a  vast 
difference  ;  so  great,  indeed,  that  our  fruits  may  be  regarded 
as  artificial  products,  that  is  to  say,  as  creations  of  human 
industry.  A  proof  of  this  is  the  fact  that  if  the  constant 
labor  of  cultivation  be  relaxed  for  a  few  years,  these  prod- 
ucts speedily  degenerate,  i.e.  they  revert  to  a  state  of  nature 
and  lose  all  those  properties  with  which  human  industry 
had  endowed  them. 

It  is  true,  however,  that  some  wealth  is  not  the  product  of 
labor,  precisely  because  it  is  not  a  product ;  i.e.  it  exists  before 
any  act  of  production.  I  refer  to  the  soil  and  all  the  organic 
objects  or  inorganic  substances  with  which  it  supplies  us,  —  the 
bubbling  spring  of  water  or  petroleum,  the  growing  forest, 
the  natural  prairie,  the  stone-quarry,  the  coal  or  metal  mine, 
the  waterfall  that  turns  the  mill-wheel,  the  guano  bed  de- 
posited by  sea-birds,  or  the  sea  teeming  with  fish. 

Yet,  to  understand  the  part  played  by  labor  even  in  this 
"  unproduced  "  wealth,  we  must  bear  in  mind  two  points  :  — 

(1)  This  natural  wealth  does  not  exist,  as  wealth,  i.e.  as  use- 
ful and  valuable  objects,  until  human  intelligence  has  been 
able,  first,  to  discover  its  existence,  and,  secondly,  to  per- 
ceive that  it  possesses  qualities  which  render  it  fit  to  satisfy 
some  of  our  wants.     Take  any  piece  of  land,  say  wheat- 
growing  land  in  America.     Why  is  this  land  wealth  ?     Be- 
cause some  explorer  or  pioneer,  following  in  the  footsteps  of 
Columbus,  discovered  this  particular  spot.     Now  discovery, 
whether  of  a  new  world  or  merely  of  mushrooms  in  the  forest, 
always  presupposes  labor  of  some  kind. 

(2)  Natural  wealth  cannot  be  utilized,  i.e.  cannot  be  made 
to  serve  for  the  satisfaction  of  human  wants,  until  it  has 
undergone  a  certain  amount  of  labor.     In  the  case  of  virgin 


LABOR  73 

soil,  it  is  necessary  to  clear  it  of  trees  and  underbrush.  In 
the  case  of  a  mineral  spring,  it  must  be  made  possible  to  col- 
lect and  store  the  water.  Even  mushrooms  and  fish  must 
be  gathered  or  caught  and  then  prepared  for  use  by  cooking. 

II.  How  Labor  Produces 

We  must  distinguish  three  varieties  of  labor  :  — 
(1)  Manual  labor.  When  we  consider  the  infinite  variety 
of  products  which  result  from  human  industry  we  are  likely 
to  suppose  that  labor  is  a  very  complex  power  which  defies 
all  analysis.  Yet  it  is  nothing  of  the  sort.  Labor  is  noth- 
ing more  than  muscular  energy  directed  by  intelligence.  It 
cannot  produce  any  other  effects  than  those  of  any  motive 
force  —  a  weak  motive  force  —  viz.,  a  movement  or  change  of 
place.  This  movement  may  be  a  displacement  of  the  object 
itself,  or  of  its  component  parts.  In  the  latter  case  we  say 
that  there  is  a  change  of  form  —  a  transformation  —  but  every 
change  of  form  is  really  only  a  displacement.  The  exquisite 
shapes  assumed  by  clay  under  the  hand  of  the  potter  or  the 
statuary,  the  rich  and  ingenious  patterns  wrought  in  lace  by 
the  fingers  of  the  lace-maker,  are  only  the  effects  of  the 
arrangement  or  displacement  of  molecules  of  clay  or  threads 
of  tissue.  All  that  man's  labor  can  do  is  to  stir,  separate, 
connect,  insert,  superpose,  and  arrange  ;  all  these  are  only 
different  kinds  of  motion  and  transposition.  Take  the  vari- 
ous processes  in  the  production  of  bread  :  ploughing,  sow- 
ing, reaping,  winnowing,  grinding,  sifting,  kneading,  baking, 
— these  are  nothing  but  movements  of  matter.  Analyze  any 
industry,  and  no  other  factor  can  be  found,  for  this  is  the 
only  part  man  plays  in  the  work  of  production  and  is  the 
limit  of  his  power.  All  the  profound  transformations  that 
take  place  in  the  constitution  of  matter,  changes  which  modify 
its  physical  or  chemical  properties  and  help  in  production ;  the 
mysterious  evolution  of  a  plant  from  its  seed;  the  fermen- 
tation that  turns  a  sugary  syrup  into  alcohol ;  the  chemical 


74  PRINCIPLES    OF   POLITICAL    ECONOMY 

process  that  transforms  carbon  and  iron  into  steel ;  —  these 
are  not  man's  work.  All  he  does  is  to  put  the  proper  mate- 
rials in  the  right  place,  the  seed  in  the  ground,  the  vintage  in 
the  vat,  the  ore  in  the  furnace.  Nature  does  the  rest. 

When  we  consider  how  feeble,  relatively,  this  motive 
power  of  man  is,  and  how  limited  its  field  of  action,  we  are 
astounded  that  it  has  nevertheless  been  potent  enough  to 
transform  the  world. 

.  (2)  All  physical  labor,  properly  so  called,  must  be  preceded 
by  purely  intellectual  labor  which  we  may  call  invention.  It 
is  because  of  discovery  and  invention  that  the  patrimony  of 
mankind  is  increased  every  day  by  some  new  conquest. 
From  the  soil  that  makes  the  mud  of  our  streets  we  have 
learned  to  manufacture  aluminum  ;  industry  has  converted 
the  apparently  worthless  residue  of  coal  into  perfumes  or 
into  dyes  more  splendid  than  Tyrian  purple.  Yet  the  list  of 
things  which  we  know  how  to  utilize  is  short  when  com- 
pared with  the  immense  number '  of  those  that  serve  no 
human  use.  Of  the  140,000  known  varieties  of  the  vege- 
table kingdom,  we  have  learned  to  cultivate  and  use  less  than 
300.  Of  the  hundreds  of  thousands  of  species  in  the  animal 
kingdom,  there  are  barely  200  that  we  employ  for  any  pur- 
pose whatever.  In  the  inorganic  world  the  proportion  is" 
even  more  unfavorable.  But  the  list  of  our  riches  is  every 
day  being  lengthened,  and  there  is  every  reason  to  believe 
that  if  our  science  were  perfect  there  would  not  be  a  single 
blade  of  grass  or  a  grain  of  sand  for  which  we  had  not  dis- 
covered some  use. 

Invention  does  not  mean,  as  might  be  believed,  the  rare 
idea  that  springs  from  the  mind  of  a  man  of  genius  ;  it  is  a 
requisite  of  every  productive  act,  even  the  most  humble. 
There  is  no  movement  of  the  arms  or  fingers  in  any  produc- 
tive act  that  was  not  invented  by  some  one. 

It  should  be  noted  that  every  invention,  once  made,  may 
serve  for  an  indefinite  number  of  productive  acts,  or  acts  of 
reproduction.  It  is  precisely  this  possibility  which  makes 


LABOR  75 

it  difficult  for  the  law   to  protect  the   property   rights  of 
inventors. 

(3)  Finally,  it  must  be  remembered  that  all  collective  labor 
(i.e.  all  labor,  save  when  a  man  works  alone  and  for  him- 
self )  requires  direction  or  supervision.  Each  laborer '  in  a 
productive  enterprise  is  not  allowed  to  do  as  he  pleases,  in- 
dependently of  each  other  laborer  ;  he  must  be  told  what  to 
do,  according  to  a  general  plan.  This  planning  or  directing 
is  itself  a  very  effective  kind  of  labor,  the  importance  of 
which  increases  as  production  is  conducted  on  an  increasingly 
large  scale.  Misdirected  labor  is  apt  to  be  valueless  ;  hence 
the  labor  of  intelligent  direction  is  a  value-creating  function. 

III.    The  Evolution  of  Ideas  concerning  the  Productivity  of 

Labor 

It  is  interesting  to  follow  the  succession  of  economic  doc- 
trines regarding  this  problem  of  the  productivity  of  various 
kinds  of  labor.  The  title  of  "  productive,"  originally  ap- 
plied to  only  one  kind  of  labor,  has  gradually  been  extended 
in  its  application,  and  is  now  bestowed  on  all  kinds  without 
exception. 

(1)  The  physiocrats  confined  the  epithet  "productive  "  to 
agricultural  labor  (including  hunting,  fishing,  and  mining,  as 
similar  in  nature),  and  denied  it  to  all  other  labor,  even  that 
of  manufacturing.     The  reason  assigned  for  this  discrimi- 
nation was  that  the   above-named   pursuits  furnish  all  the 
materials  for  wealth,  while  other  occupations  simply  work 
up  these  materials. 

(2)  The  definition  of  the  physiocrats  was  unquestionably 
too  narrow.     The  raw  product  of  agriculture  and  of  mining 
is  usually  altogether  unfit  for  consumption  ;  it  must  undergo 
numerous  modifications  which  are  effected  by  manufacturing 
industries.     The  latter  are  the  indispensable  complement  of 
farming,  and  without  it  the  process  of  production  is  as  incom- 
plete as  a  play  with  the  last  act  suppressed.     Of  what  use 


76  PRINCIPLES    OF   POLITICAL    ECONOMY 

is  the  ore  at  the  mouth  of  the  mine,  unless  it  is  destined 
to  go  to  the  foundry  ?  Of  what  use  is  wheat  before  it  has 
passed  through  the  hands  of  the  miller  and  the  baker  ?  With- 
out the  weaver's  labor  flax  would  be  as  useless  as  the  nettle. 
How  then  can  we  refuse  to  call  these  labors  productive  ? 
Without  them  all  these  kinds  of  wealth  would  be  useless  to 
us  ;  in  other  words,  they  would  not  be  wealth  at  all. 

As  for  the  contention  that  agriculture  and  mining  create 
wealth,  and  that  manufacture  or  industry  in  the  narrower 
sense  of  the  term  only  transforms  it,  we  must  call  this  an 
error.  The  farmer  creates  nothing  ;  he  too  simply  trans- 
forms the  elements  that  are  contained  in  the  soil  and  air. 
He  makes  wheat  from  water,  potassium,  silicon,  phosphates, 
and  nitrogen,  just  as  the  soap-maker  manufactures  soap  from 
soda  and  fatty  substances. 

Therefore,  ever  since  Adam  Smith  wrote  on  this  subject, 
no  one  has  hesitated  to  regard  manufacturing  as  productive 
labor. 

(3)  With  regard  to  the  labor  of  transportation  there  has 
been  more  hesitation,  because  transportation  seems  to  make 
no  change  whatever  in  the  article  transported.  Is  not  a 
package  of  goods  the  same  when  sent  from  New  York  as 
when  it  reaches  San  Francisco  ?  This  feature  of  identity,  it 
was  urged,  distinguishes  transportation  from  manufacturing. 

But  the  distinction  is  scarcely  philosophical,  since  every 
displacement  involves  an  essential  modification  of  bodies. 
Indeed,  it  is  the  only  modification  that  w^e  can  make  in 
matter.  Besides,  if  we  decide  that  displacement  is  not 
essential  enough  a  modification  to  entitle  it  to  be  called  pro- 
ductive, then  we  cannot  call  mining  productive  either.  For 
what  distinction  is  there  between  the  work  of  the  miner,  who 
transports  coal  from  beneath  the  earth  to  its  surface,  and 
that  of  the  wagoner  who  takes  it  away  to  such  places  as  re- 
quire it,  unless  we  pretend  that  displacement  is  productive 
only  when  it  takes  place  vertically,  and  not  so  when  it  takes 
place  horizontally  ?  It  is  scarcely  necessary  to  add  that  just 


LABOR  77 

as  manufacture  is  the  indispensable  complement  of  agricul- 
ture and  mining,  so  transportation  is  the  complement  of  the 
preceding  operations.  What  Avould  be  the  use  of  stripping 
bark  in  the  Brazilian  forests,  of  extracting  guano  in  the 
Peruvian  islands,  of  hunting  elephants  in  South  Africa  for 
their  tusks,  if  there  were  no  means  of  taking  these  products 
to  the  places  where  they  are  needed?  What  profits  it  a 
farmer  to  have  the  finest  crop  in  the  world,  if  there  is  no  way 
to  carry  it  to  the  consumers  ? 

(4)  With  regard  to  commerce  or  trade,  the  hesitation  has 
been  even  longer.     It  may  be  said  that  commerce  or  trade, 
reduced  to  its  simplest  terms,  i.e.  buying  for  the  purpose  of 
selling,  does  not  imply  any  creation  of   wealth.     No  doubt 
those  who  engage  in  trade  may  make  much  money,  but  this 
does  not  augment  the  general  wealth.     In  fact  we  shall  see 
that  the  multiplication  of  traders  and  middlemen  may  become 
a  veritable  social  scourge,  and  even  involve  a  loss  of  wealth 
for  the  community. 

But  we  must  observe,  on  the  other  hand,  that  commerce 
cannot  very  well  be  separated  from  transportation.  It  was 
at  a  late  period  in  the  history  of  economic  science  that  these 
two  operations  came  to  be  distinguished.  Even  to-day, 
merchants  are  still  the  real  directors  of  transportation  ;  the 
carrying  industries  only  execute  their  bidding.  Moreover, 
they  also  preserve  and  store  up  goods,  and  sometimes  even 
subject  them  to  slight  modifications.  The  cloth  merchant 
cuts  his  goods  into  conveniently-sized  pieces  ;  the  grocer 
roasts  his  coffee.  Finally,  even  when  commerce  is  nothing 
more  than  exchange  pure  and  simple,  the  mere  act  of  trans- 
ferring a  thing  to  the  person  who  will  utilize  it  must  be 
regarded  as  productive  ;  for  to  make  useful  a  thing  that  was 
not  useful  before,  is  the  whole  secret  of  productiveness. 

(5)  Finally,  discussion  has  been  keenest  with  regard  to 
services,  such  as  those  rendered  by  the  liberal  professions.     It 
may  seem  strange,  for  instance,  to  apply  the  term  "  productive  " 
to  the  labor  of  the  judge  who  gives  a  decision,  or  of  the  sur- 


78  PRINCIPLES    OF   POLITICAL    ECONOMY 

geon  who  amputates  a  leg.  Where  are  their  "  products  "  ? 
Where  is  the  "  wealth  "  that  they  have  produced  ? 

It  is  sufficient,  however,  to  note  two  facts  in  this  connec- 
tion: (a)  That  production  has  for  its  direct  object  the  satis- 
faction of  human  wants,  and  only  indirectly  the  creation  of 
wealth.  The  fact  that  an  act  of  man  may  satisfy  the  wants 
of  his  fellow-men  directly,  without  the  intervention  of 
wealth,  that  is,  without  the  use  of  any  material  objects, 
should  not  rob  it  of  its  productive  character;  (5)  that  in  the 
social  organism,  thanks  to  the  law  of  the  division  of  labor 
which  we  shall  explain  later,  there  is  such  a  solidarity  and 
interdependence  in  the  labors  of  men  that  it  is  not  possible 
to  separate  them,  and  immaterial  services  are  an  indispen- 
sable condition  of  the  production  of  all  material  wealth. 

Take  the  production  of  bread.  We  need  not  hesitate 
about  classing  as  productive  the  labor  of  ploughmen,  sowers, 
reapers,  wagoners,  railroad  employees,  millers,  and  bakers, 
beginning  with  Triptolemus,  the  legendary  inventor  of  wheat, 
and  including  all  his  successors  who  have  discovered  any  of 
the  varieties  of  cereals  or  who  have  invented  the  rotation  of 
crops  or  the  methods  of  improved  agriculture.  But  we  can- 
not stop  at  mere  manual  labor,  strictly  speaking.  It  is 
clear  that  the  labor  of  the  superintendent  or  of  the  landlord, 
although  he  may  not  himself  put  his  hand  to  the  plough, 
is  as  important  for  the  production  of  wheat  as  the  labor  of 
the  shepherd  in  the  production  of  wool,  although  he  may 
not  shear  the  sheep  himself.  Nor  can  we  ignore  the  work  of 
the  engineer,  who  devises  the  system  of  irrigation  used  on 
the  farm,  or  that  of  the  architects  and  builders  who  have 
constructed  the  farmhouses  and  the  barns. 

Must  we  stop  here  ?  If  we  do,  what  is  to  be  said  of  the 
labor  of  the  constable  who  keeps  off  the  tramps,  or  the 
county  attorney  who  prosecutes  them,  or  the  justice  who  sen- 
tences them,  or  the  soldier  who  protects  the  harvest  from 
foreign  invaders  that  are  even  more  dangerous  than  native 
thieves  ?  Do  they  not  also  contribute  to  the  production  of 


LABOR  79 

wheat  ?  And  what  must  be  said  of  the  work  of  those  who 
trained  the  farmer  and  his  employees,  the  instructor  who 
taught  them  the  first  principles  of  agriculture  or  the  means 
of  acquiring  them,  and  the  doctor  who  keeps  them  in  good 
health  ?  Is  it  a  matter  of  indifference,  even  from  the  view- 
point of  wheat-production,  whether  or  not  the  laborers  are 
well-instructed  and  healthy,  and  that  they  enjoy  the  advan- 
tages of  social  order,  security,  good  government,  and  good 
laws  ?  Should  we  disregard,  as  of  no  importance  in  the  pro- 
duction of  wheat,  even  such  apparently  alien  labors  as  those 
of  authors,  poets,  and  artists  ?  May  not  the  taste  for  farming 
be  developed  by  novelists  who  depict  the  beauties  of  rustic 
life,  or  by  poets  who  celebrate  the  pleasures  of  the  country, 
and  teach  us  to  repeat,  after  the  author  of  the  "  Georgics," 

Fortunatos  nimium  sua  si  bona  norint 
Agricolas ! 

Where,  then,  should  the  line  be  drawn  ?  Productive 
labor  has  been  extended  to  the  farthest  bounds  of  society, 
like  the  concentric  circles  made  by  throwing  a  stone  in  a 
pond.  Undoubtedly,  the  various  kinds  of  labor  we  have 
enumerated  do  not  contribute  in  just  the  same  way  to  the 
production  of  wheat ;  some  act  directly,  others  indirectly ; 
but  none  of  them,  beginning  with  the  ploughman's  toil  and 
reaching  to  the  work  of  the  President,  could  be  suppressed 
without  affecting  the  raising  of  wheato 

There  is  even  no  necessity  for  determining  which  of  these 
labors  is  most  useful  economically.  According  to  the  order 
of  importance  of  the  wants  that  they  supply,  we  might  be  in- 
clined to  put  at  the  top  of  the  list  the  work  of  discovery  and 
invention,  then  farming,  then  manufacturing,  transportation, 
and  last  of  all  commerce  and  public  services.  But  it  should 
immediately  be  objected  that  if  a  country  is  poorly  governed, 
or  if  it  has  no  means  of  transportation,  all  its  agricultural 
wealth  is  of  no  avail.  What  we  need  is  a  proper  coordination 
of  these  various  productive  functions  and  labors.  Unfortu- 


80  PRINCIPLES   OF   POLITICAL   ECONOMY 

nately  this  perfect  coordination  is  far  from  realized  even  in 
civilized  societies.  Some  nations  expend  millions  for  the  de- 
velopment of  means  of  transportation  without  first  ascertain- 
ing whether  there  will  be  any  products  to  transport.  Again, 
the  number  of  persons  engaged  in  petty  trade  or  employed 
in  government  offices  is  increasing  every  day,  while  agri- 
culture is  being  more  and  more  abandoned.1 

IV.   Pain  as  a  Factor  of  Labor 

All  productive  labor  involves  toil.  This  is  a  law  of  su- 
preme importance  in  political  economy.  If  labor  did  not 
involve  unpleasantness,  all  economic  phenomena  would  be 
entirely  different  from  what  they  now  are.  If  men  worked 
only  for  pleasure,  it  would  no  longer  be  necessary  to  have 
private  property  as  a  stimulus  to  toil,  and  the  most  serious 
objection  to  communism  would  lose  its  force.  Fourier,  the 
socialist,  understood  this  perfectly.  The  basis  of  his  scheme 
of  a  future  society  was  to  make  labor  attractive.  He  insisted 
that  labor  was  painful  solely  because  of  our  defective  social 
organization  ;  he  boasted  that  in  his  "  phalanstery "  labor 
would  be  made  attractive  to  all  persons  by  having  the 
choice  of  occupations  free,  by  changing  them  frequently, 
by  working  only  a  short  time,  by  an  appeal  to  the  spirit  of 
emulation,  and  by  a  hundred  other  devices,  some  of  which 
are  ingenious  and  some  fantastic.  He  proposed  to  make 

1  The  recent  census  figures  regarding  the  number  of  persons  engaged  in 
gainful  occupations  show  the  following  distribution  :  — 

1870  1880  1890  1900 

Agriculture,  fisheries,  mining 49%  46%  40%  38% 

Manufactures 20  20  22  22 

Commerce  and  transportation 10  11  15  16 

Liberal  professions 3  3  4  4 

Personal  service 18  20  19  20 

This  table  indicates  that  the  number  engaged  in  the  first  two  groups, 
which  are  the  only  directly  productive  ones,  has  fallen  from  69  to  60  per  cent, 
in  30  years  ;  while  the  number  of  the  other  three  groups,  which  are  unpro- 
ductive in  the  old  acceptation  of  the  term,  has  risen  from  31  to  40  per  cent. 


LABOR  81 

the  work  of  the  farmer,  the  smith,  the  carpenter,  the  shoe- 
maker, etc.,  just  so  many  kinds  of  sport.  There  is  really  noth- 
ing absurd  about  this.  Labor  is  after  all  only  a  form  of 
human  activity,  and  activity  is  not  necessarily  painful.  To 
act  is  to  live  ;  absolute  inaction  is  a  torture,  so  cruel  that 
when  prolonged  in  solitary  confinement  it  may  cause  insanity 
or  death.  There  is  no  essential  difference  between  labor  and 
a  host  of  exercises  that  are  regarded  as  pleasures,  though  they 
often  require  a  greater  expenditure  of  energy  than  that  in- 
volved in  labor  ;  for  example,  mountaineering,  boating,  gar- 
dening, and  dancing.  King  Louis  XVI  found  amusement 
in  making  locks.  Why  should  not  all  men  work  for  the  love 
of  it? 

The  answer  is  that  man  finds  pleasure  in  action  only  in 
so  far  as  the  exercise  of  this  activity  is  itself  a  gratification 
and  the  performance  of  a  natural  function.  But  when  it 
is  viewed  as  the  condition  of  an  ulterior  enjoyment,  —  as 
the  effort  which  must  be  made  to  achieve  an  aim  fixed  before- 
hand (and  this  is  the  very  essence  of  labor),  —  then  it  becomes 
disagreeable.  Between  a  man  who  rows  for  pleasure  and  a 
boatman  who  rows  to  earn  a  living,  between  a  tourist  who 
climbs  a  mountain  and  the  guide  who  accompanies  him, 
between  a  girl  who  spends  her  evening  at  a  ball  and  the 
dancer  who  appears  in  a  ballet,  I  see  only  one  difference  — 
the  first  rows,  climbs,  or  dances,  solely  to  row,  climb,  or 
dance,  while  the  others  do  so  to  earn  their  living.  This  dif- 
ference, though  a  purely  subjective  one,  causes  the  same 
kinds  of  activity  to  be  regarded  by  the  latter  as  labor  and 
by  the  former  as  pleasure.  Some  men  find  their  pleasure  in 
gardening  ;  but  they  would  find  it  less  agreeable  if  they 
were  obliged  to  raise  vegetables  for  sale  in  the  market.  The 
man  who  follows  a  road  for  a  walk  may  take  pleasure  in  this 
activity  even  though  the  road  may  not  be  particularly  attrac- 
tive ;  but  the  man  who  must  traverse  it  every  morning  and 
every  evening  to  reach  his  destination  always  finds  it  long 
and  wearisome.  Now  labor  is  the  path  that  almost  all  man- 


82  PRINCIPLES   OF   POLITICAL   ECONOMY 

kind  must  follow  in  order  to  earn  a  livelihood ;  hence,  in 
accordance  with  the  old  curse  in  Genesis,  "  they  labor  in  the 
sweat  of  their  brow."1  Doubtless  even  the  humblest  labor 
has  its  joys,  the  joys  of  a  duty  fulfilled  and  a  natural  law 
voluntarily  accepted  ;  but  these  austere  joys  are  felt  only  by 
a  chosen  few,  and  we  should  fall  into  the  most  chimerical 
optimism  if  we  believed  that  a  change  of  environment  and  of 
social  organization  would  some  day  lead  all  men  to  labor 
solely  for  pleasure. 

In  order  to  induce  men  to  work,  and  in  order  to  counter- 
balance the  unpleasantness  always  associated  with  toil,  a 
motive  of  some  kind  is  needed.  Formerly,  when  work  was 
done  by  slaves,  the  whip,  i.e.  constraint,  furnished  the  incen- 
tive. For  the  altruist  of  the  future,  the  sense  of  a  social 
duty  voluntarily  performed  will  perhaps  be  sufficient.  But 
for  the  man  of  to-day  as  a  general  rule  the  motive  is  self- 
interest.  Every  man  who  labors  is  subjected  to  the  influence 
of  two  opposing  forces.  On  the  one  hand  is  the  desire  to 
procure  enjoyment  or  the  means  of  obtaining  enjoyment ;  on 
the  other  is  the  dislike  for  work,  or  rather  for  the  unpleas- 
antness of  work.  According  as  one  of  these  desires  out- 
weighs the  other,  man  will  continue  or  will  abandon  his 
labor. 

As  Professor  Stanley  Jevons  ingeniously  observes,  the  pain 
endured  by  the  worker  increases  with  the  continuation  of 
labor,  while  the  pleasure  derived  from  the  reward  of  labor 
constantly  diminishes  as  the  more  pressing  wants  are  satis,- 

1  Socialists  and  anarchists  have  bitterly  condemned  the  Bible  for  repre- 
senting labor  as  something  humiliating  and  infamous,  as  the  consequence  of 
the  Fall,  and  as  a  kind  of  punishment.  They  are  evidently  not  very  familiar 
with  the  text.  In  reality,  the  Bible  represents  God  Himself  as  the  first  of 
workers,  since  He  wrought  six  days  and  rested  the  seventh.  The  institution 
of  a  day  of  rest  (which  presupposes  labor)  dates  before  the  Fall.  Man,  we 
are  expressly  told,  was  placed  in  the  Garden  of  Eden  "  to  cultivate  it." 

The  doctrine  taught  by  the  Bible  is  this :  In  the  world  as  made  by  the 
Creator  work  was  attractive  ;  but  evil  having  entered  it  through  the  fault  of 
man,  labor  lost  the  character  of  joyous  and  vivifying  activity,  which  had 
previously  been  attached  to  it  by  the  will  of  God. 


LABOR  83 

fied.  Of  the  two  desires,  one  prompting  him  to  work,  the 
other  urging  him  to  stop,  it  is  clear  that  the  latter  must 
triumph  eventually.  Take  a  laborer  drawing  buckets  of 
water  from  a  well.  Fatigue  increases  with  each  successive 
bucket  he  has  to  draw.  The  utility,  moreover,  of  each  suc- 
cessive bucket  decreases ;  the  first  of  them  probably  is  neces- 
sary for  drinking  and  cooking,  the  second  serves  for  watering 
cattle,  the  third  for  cleaning,  the  fourth  for  watering  the 
garden,  the  fifth  for  sprinkling  the  road.  At  which  number 
will  he  stop  ?  This  depends  partly  on  his  power  of  support- 
ing fatigue,  but  chiefly  on  the  number  and  intensity  of  his 
wants.  The  Esquimau,  who  uses  water  only  to  quench  thirst, 
will  stop  at  the  first  or  second  bucket ;  but  the  Dutchman, 
who  cleans  his  house  from  roof  to  cellar,  may  have  to  draw 
fifty  buckets  before  he  thinks  he  has  enough  water. 

If  in  addition  to  the  stimulus  of  present  and  actual  wants 
there  is  also  that  of  future  wants,  —  if,  for  instance,  in 
a  land  where  water  is  scarce  the  worker  thinks  of  filling  a 
well  in  anticipation  of  days  of  drought  —  productive  activity 
is  greatly  increased.  But  the  disposition  to  compare  imme- 
diate toil  with  remote  gratification  —  a  faculty  which  is  called 
foresight  —  belongs  only  to  civilized  races,  and,  among  these, 
only  to  the  wealthier  classes.  The  savage  and  the  poor  are 
equally  improvident. 

V.   Time  as  a  Factor  of  Labor 

All  labor  not  only  involves  a  certain  amount  of  displeas- 
ure, but  also  requires  a  certain  amount  of  time.  Between 
the  time  when  labor  begins  and  the  time  when  it  produces 
the  anticipated  results,  a  shorter  or  longer  period  must 
necessarily  intervene.  This  is  one  of  the  essential  condi- 
tions of  all  production,  a  condition  that  is  absolutely  general. 
Nature  herself  is  subject  to  it :  long  months  pass  by  before 
the  seed  slumbering  in  the  soil  is  transformed  into  wheat, 
and  many  years  are  required  to  change  the  acorn  into  the 
sturdy  oak. 


84  PRINCIPLES    OF    POLITICAL   ECONOMY 

As  a  general  rule  the  time  of  waiting  is  proportionate 
to  the  productiveness  of  the  enterprise.  Labors  that  furnish 
man  with  only  a  day's  food,  enabling  him  to  live  "from 
hand  to  mouth,"  —  such  labors  as  fishing  or  hunting  or 
gathering  wild  fruit,  —  do  not  require  more  than  a  few  hours. 
The  time  needed  to  complete  those  great  industrial  and 
engineering  enterprises  that  are  the  glory  of  the  present 
day,  —  such  as  mines,  artesian  wells,  railways,  tunnels,  and 
canals,  —  is  long  and  proportionate  to  the  magnitude  of  the 
results.  It  will  be  many  years  before  the  Isthmian  Canal 
will  be  completed,  although  it  was  begun  in  1881. 

The  element  of  time,  an  indispensable  factor  in  all  pro- 
ductive enterprises,  is,  as  we  shall  presently  see,  one  of  the 
principal  reasons  for  the  importance  of  capital  and  the  privi- 
leged position  of  those  who  happen  to  own  it.  It  is  plain 
that  the  men  employed  in  building  railroads  or  digging 
canals  must  subsist  while  engaged  in  such  enterprises ;  the 
requisite  food  and  materials  must  be  advanced  by  those  who 
possess  capital. 

It  is  not  enough  to  note  that  time  is  an  indispensable 
factor  of  all  production  ;  we  must  add  that  man  has  only 
a  limited  amount  of  time  at  his  disposal,  not  only  because 
life  is  short,  but  also  because  many  deductions  must  be  made 
from  a  man's  time ;  of  these  deductions,  three  deserve  special 
mention :  — 

(1)  Man  cannot  work  every  hour  of  the  day.      Time  for 
sleep  and  for  meals  must  be  deducted,  and  experience  has 
shown  that  nothing  is  gained  by  trying  unduly  to  lengthen 
the  working-day.      Custom  and  law  fix  this  period  at  about 
ten  or  twelve  hours,  and  there  is  a  strong  tendency  to  reduce 
it  to  eight  hours,  i.e.  one-third  of  a  day. 

(2)  Man  cannot  work  all  the  days  of  the  year.     There  is 
no  country  in  which  there  are  no  holidays.     England   and 
America  rigorously  obey  the  rule  to  observe  the  Sabbath. 
Countries   which,  like    France,  pride  themselves   on  being 
above  the  sabbatical  superstition,  make  Monday  a  holiday. 


LABOR  85 

Moreover,  days  of  illness  must  be  taken  into  account.  So, 
after  all,  it  is  rare  for  even  the  most  industrious  workman  to 
reach  an  average  of  300  work-days  a  year.1 

(3)  Man  cannot  work  all  the  years  of  his  life.  He  must 
deduct  the  years  of  infancy,  and  also  the  years  of  old  age  (if 
he  is  fortunate  enough  to  attain  them).  From  the  viewpoint 
of  productivity  those  countries  are  most  favored  which  count 
the  largest  number  of  persons  between  the  ages  of  eighteen 
and  sixty  years,  i.e.  persons  who  are  actively  productive. 
Unfortunately,  the  majority  die  before  attaining  the  end  of 
this  productive  period,  and  a  large  number  do  not  even  enter 
upon  it.2 

1  The  average  in  France,  according  to  official  statistics,  is  295. 

2  According  to  the  census  of  1900,  the  number  of  persons  in  the  United 
States  between  the  ages  of  15  and  60  was  597  per  1000  of  the  population  ;  in 
France  the  number  is  610  per  thousand,  and  in  Germany,  565. 

The  average  age  of  decedents,  according  to  the  census  of  1900,  was  35.2 
years.  In  France,  of  every  thousand  persons  born,  644  reach  the  age  of  18 
years,  and  360  pass  the  age  of  60  years. 

The  average  duration  of  human  life  in  civilized  nations  is  about  33  years. 
It  is  probably  within  the  truth  to  declare  that  one-quarter  of  the  number  of 
persons  born  die  before  the  age  of  6,  one-half  before  the  age  of  16,  and  only 
one  person  of  each  100  born  reaches  the  age  of  65. 

The  average  duration  of  human  life  is  a  matter  of  great  economic  impor- 
tance, inasmuch  as  a  very  slight  increase  in  the  average  means  a  great  gain 
of  productive  power.  The  productive  years  of  life  of  a  population  must  sup- 
port not  only  themselves,  but  also  the  unproductive  years.  (Consult  RT 
Mayo-Smith,  Statistics  and  Sociology,  Vol.  I.) 

Many  European  nations  are  severely  handicapped  in  their  productive 
powers  by  the  existence  of  large  standing  armies,  consisting  of  men  in  the 
prime  of  life  who  not  only  are  not  productive,  but  who  absorb  a  large  part 
of  the  products  of  those  that  are  engaged  productively.  The  total  peace 
establishment  of  Germany,  France,  Italy,  Austria,  Russia,  Great  Britain,  and 
Turkey  in  1902  was  3,283,905  men. 


CHAPTER   II  — NATURE 

THE  term  "  nature "  does  not  signify  a  definite,  specific 
factor  of  production,  but  the  sum  total  of  those  elements  and 
productive  forces  that  are  furnished  by  our  natural  en- 
vironment.1 Before  we  can  produce  anything  we  must  have 
a  favorable  environment,  land,  and  raw  material  that  can  be 
utilized.  Nature  also  provides  the  forces  that  are  used  to 
propel  machinery. 

I.    Environment 

Some  historians  and  philosophers  may  have  exaggerated 
the  influence  of  geographical  environment  on  the  political, 
literary,  and  artistic  development  of  peoples  ;  but  it  would 
be  difficult  to  exaggerate  this  influence  so  far  as  it  concerns 
economic  development  and  productive  power.2 

(1)  Climatic  conditions.  Tropical  lands  may  have  wit- 
nessed the  growth  of  brilliant  civilizations,  but  they  have 
never  given  rise  to  great  industrial  nations.  Nature  in  the 
tropics  seems  to  discourage  productive  activity,  both  by  her 
generosity  and  by  her  outbursts  of  violence.  In  those  blissful 
climes  where  food  is  the  gift  of  nature,  and  there  is  no  need 

1  The  term  "land  "  was  formerly  used  instead  of  "  nature."     These  two 
expressions  are,  in  fact,  equivalent,  if  land  is  supposed  to  include  not  only 
the  soil  fit  for  cultivation,  but  the  whole  terrestrial  globe  and  the  atmosphere 
which  surrounds  it.     To  be  sure,  the  only  portion  of  the  universe  that  can 
serve  as  the  field  for  our  economic  activity  is  our  planet, — and  only  the 
superficial  crust  of  that.     As  savage  tribes,  however,  have  been  known  to 
make  use  of  the  crude  iron  found  in  meteoric  stones,  and  as  every  motive 
force  (winds,  water  currents,  and  the  caloric  energy  stored  up  in  coal)  is, 
according  to  science,  due  to  solar  heat,  the  term  "nature  "  is  more  accurate 
than  the  term  "  land." 

2  It  is  well  known  that  Montesquieu  attributed  a  decisive  influence  to 
climate.    One  branch  of  the  school  of  Le  Play,  headed  by  M.  Demolins, 

86 


NATURE  87 

for  clothing  or  even  housing,  man  learns  to  rely  on  nature 
and  to  avoid  all  effort.  In  those  regions,  moreover,  physical 
forces  are  so  exceedingly  violent,  their  various  manifesta- 
tions (torrential  rains,  floods,  earthquakes,  cyclones)  are  so 
irresistible,  that  man  is  cowed  and  does  not  even  conceive  the 
bold  idea  of  mastering  and  utilizing  them.  He  scarcely  pro- 
vides for  self-defence.  In  our  temperate  lands,  on  the  other 
hand,  nature  is  so  niggard  as  to  compel  man  to  rely  in  a  great 
measure  on  his  own  efforts.  But  the  forces  she  displays  are 
so  gentle  as  to  allow  human  industry  to  tame  and  utilize 
them.  In  these  climates  she  may  be  said  to  foster  productive 
activity  both  by  what  she  refuses  and  by  what  she  gives. 

(2)  Geographical  configuration.  Who  can  estimate  the  in- 
fluence that  England's  insular  position  has  exerted  on  her 
political,  industrial,  and  commercial  development  ?  The  con- 
tinent of  Africa,  known  to  man  from  the  remotest  antiquity, 
and  the  seat  of  the  oldest  known  civilization  (that  of  Egypt), 
has  to  this  very  day  remained  beyond  the  pale  of  all  economic 
progress,  principally  for  want  of  a  good  system  of  navigable 
rivers.  The  same  cause  accounts  fundamentally  for  the  fact 
that  North  and  South  America,  discovered  hardly  four  centu- 
ries ago,  are  covered  with  an  elaborate  network  of  commercial 
routes  running  in  all  directions.  The  rivers  of  the  New 
World  flow  into  the  ocean  by  large  estuaries,  and  are  so  in- 
tricately joined  that  we  can  pass  from  the  tributaries  of  the 
Plata  into  those  of  the  Amazon  and  thence  into  the  Orinoco, 

considers  environment  the  starting-point  of  all  social  science.  It  distin- 
guishes three  kinds  of  soil,  which  give  rise  to  three  distinct  types  of  primitive 
societies  :  the  steppe  to  the  pastoral  races,  the  seashore  to  fisher  tribes,  and 
the  forest  to  the  hunter  peoples.  These  are  the  fundamental  types  of  simple 
societies,  i.e.  those  which  subsist  solely  on  the  spontaneous  products  of 
the  soil. 

But  this  school  goes  farther,  and  by  means  of  the  same  theory  explains 
the  origin  of  all  complex  or  civilized  societies.  Thus  the  primitive  state  of 
the  soil  is  made  the  origin,  as  well  as  the  sole  cause  of  all  present  varieties 
of  property,  family,  government,  etc.  This  theory  has  been  expounded  in 
a  very  interesting  manner  by  M.  Demolins  in  his  recent  book,  "Comment 
la  route  crde  le  type  social." 


88  PRINCIPLES    OF    POLITICAL   ECONOMY 

or  from  the  basin  of  the  Mississippi  to  the  Great  Lakes,  almost 
without  leaving  the  waterway.  But  the  rivers  of  Africa, 
though  they  are  quite  as  large  as  those  of  America,  do  not 
invite  commerce ;  a  barrier  of  impassable  cataracts  or  pesti- 
lential swamps  makes  the  invasion  of  modern  enterprise  next 
to  impossible. 

(3)  The  geological  nature  of  the  soil  and  subsoil  is  quite  as 
important ;  it  creates  agricultural  and  mineral  wealth.  The 
dread  with  which  England  calculates  the  time  when  her  coal 
mines  are  liable  to  fail  her,  shows  well  enough  how  much 
she  owes  them  for  her  industrial  development.1 

A  nation  is  supported  not  only  by  its  soil  but  also  by  its 
sub-soil,  i.e.  by  its  supply  of  coal,  metals,  petroleum,  and  all 
the  other  mineral  resources  that  it  possesses.  Countries  that 
possess  both  a  fertile  soil  for  agriculture,  and  a  sub-soil  that  is 
rich  in  industrial  raw  materials,  enjoy  a  great  natural  advan- 
tage over  those  that  are  not  thus  provided ;  they  can  support 
a  larger  population,  or,  at  all  events,  a  relatively  wealthier 
one.  In  1900,  there  were  in  the  United  States  581,221  per- 
sons engaged  in  mining  and  quarrying,  and  the  total  value 
of  our  mineral  production  exceeded  $1,000,000,000.2 

At  first  sight  it  would  appear  that  man  is  powerless  to 
modify  the  environment  with  which  nature  has  surrounded 

1  In  1866  Jevons  declared  that  the  English  coal  mines  would  be  exhausted 
in  a  century,  and  Mr.  Price  Williams  in  1889  made  the  same  prophecy  after 
a  careful  study  of  statistics  regarding  coal  mining  in  that  country. 

There  seems  to  be  no  doubt  that  China  possesses  an  enormous  supply  of 
coal.  The  coal  fields  of  China,  Japan,  Great  Britain,  Germany,  Russia,  and 
India  contain  apparently  about  303,000,000,000  tons,  which  is  enough  for  450 
years  at  the  present  rate  of  consumption.  If  we  add  the  North  and  South 
American  coal  fields,  the  supply  is  about  doubled.  It  should  be  borne  in 
mind,  moreover,  that  improved  machinery  has  greatly  increased  the  yield 
per  miner. 

2  For  the  year  1901  the  exact  amount  was  $1,086,529,521.     The  most  im- 
portant items  in  this  total  were  :  Coal,  $348,910,469  (at  the  mines);  pig  iron, 
$242,174,000  ;    clay  products,    .$110,211,587  ;    copper,   $87,300,515  ;    gold, 
$78,666,700  ;    petroleum,   $66,417,335  ;    building  stone,  .$55,615,926  ;    iron 
ores,  $49,256,245  ;  silver,  $33,128,400 ;  lead,  $23,280,200. 


LAND  89 

him,  and  that  his  only  resource  is  to  adapt  himself  to  it  as 
best  he  can.  Yet  he  does  succeed  in  exerting  some  modi- 
fying influence  on  this  environment,  although  his  influence 
necessarily  is  limited.  He  cannot  create  mines  where  there 
are  none,  but  by  judicious  agricultural  improvements  he  can 
make  soil  cultivable,  and  change  marshes,  stagnant  ponds, 
and  even  gulfs,  into  arable  tracts.  He  cannot  alter  the  geo- 
graphical lines  drawn  by  nature,  but  with  a  little  complaisance 
on  her  part  he  can  modify  them  ;  for  instance,  by  completing 
a  network  of  inland  water  communication.  He  can  overcome 
such  barriers  as  mountains  and  arms  of  the  sea,  by  construct- 
ing roads  above,  or,  better  still,  beneath  them.  He  can  sepa- 
rate Africa  from  the  old  continent,  and  South  America  from 
the  new,  and  thus  change  these  two  peninsulas  into  islands. 
Climatic  conditions  he  certainly  cannot  alter  ;  but,  by  plant- 
ing extensive  forests,  and  by  means  of  systems  of  cultivation 
not  yet  entirely  understood,  perhaps  human  industry  will  yet 
be  able  greatly  to  modify  the  rule  of  storms  and  winds.1 

II.   Land 

A  certain  amount  of  the  earth's  surface  is  necessary  for 
man  to  stand  on.  More  is  necessary  for  him  to  sleep  on, 
still  more  for  building  a  house,  and  much  more  for  raising 
wheat  and  pasturing  flocks.  When  the  population  of  a 
country  increases  beyond  a  certain  density,  the  question  of 
surface  becomes  a  serious  one.  When  human  beings  in 
obedience  to  their  social  instincts  swarm  in  one  of  those 
huge  centres  like  London,  Paris,  or  New  York,  the  space  for 
housing  becomes  insufficient ;  plots  of  land  acquire  higher 
value  than  the  buildings  erected  on  them,  even  though  they 
be  palaces  of  costly  marble.2  As  we  shall  see  when  dealing 

1  In  fact,  some  scientists  have  proposed  to  alter  the  course  of  the  great 
maritime  currents,  such  as  the  Gulf  Stream,  for  the  purpose  of  distributing 
heat  and  cold  to  the  continents,  just  as  water  and  gas  are  distributed  in  cities. 

2  As  much  as  $450  per  square  foot  has  been  offered  for  land  in  New  York 
City  at  the  corner  of  Wall  Street  and  Broadway.      Cf .  the  interesting  article 
on  this  subject  in  the  Tale  Review  for  1902,  by  Richard  M.  Kurd. 


90  PRINCIPLES    OF   POLITICAL   ECONOMY 

with  house-rent,  the  social  consequences  which  result  from 
this  state  of  affairs  are  most  deplorable  for  the  working 
classes. 

It  would  of  course  be  absurd  to  fear  that  some  day  there 
will  not  be  room  enough  on  the  earth  for  men  to  live  on; 
yet  it  is  not  unreasonable  to  ask  whether  there  will  always 
be  enough  space  to  supply  food.  Considerable  ground  is 
required  to  supply  food  for  one  man,  although  the  minimum 
requisite  amount  is  always  being  diminished  by  the  prog- 
ress of  civilization  and  agricultural  methods.  People  that 
live  by  hunting  must  have  several  square  leagues  per 
man ;  pastoral  races  need  several  square  miles ;  agricul- 
tural nations  require  only  a  few  acres.  The  limit  falls 
as  we  pass  from  extensive  to  intensive  methods  of  farming.1 
In  China,  where  farms  are  as  small  as  our  garden  plots,  the 
prevailing  method  of  cultivation  enables  several  persons  to 
subsist  on  the  produce  of  an  acre.  Yet  the  minimum  of 
necessary  space,  though  constantly  reduced,  still  exists  and 
is  sufficient  to  cause  some  anxiety  regarding  the  destiny  of 
the  human  race. 

The  discovery  of  the  New  World,  Australia,  and  South 
Africa  has  assured  us  sufficient  territory  for  many  genera- 
tions. Yet  with  an  annual  increase  of  the  human  species 
scarcely  less  than  fifteen  millions,  these  reserves  for  the 
future  will  some  day  certainly  be  exhausted.  There  is  now 

1  In  Greenland  among  the  Esquimaux,  and  among  the  native  inhabitants 
of  the  Amazon  forests  who  live  by  hunting,  the  density  of  the  population  is 
about  one  per  thousand  square  miles.  Among  the  Kirghises  and  Turcomans 
of  Central  Asia  (who  are  shepherd  peoples)  the  density  is  less  than  one  per 
square  mile.  In  Russia,  an  agricultural  nation,  it  is  15  per  square  mile  ;  in 
industrial  nations  like  England  and  Belgium  it  is  557  and  533,  respectively, 
per  square  mile. 

In  1900  the  density  of  the  population  of  the  United  States  was  25.6  per 
square  mile  ;  in  1890  and  1880,  respectively,  it  was  21.2  and  17.3 ;  but  at  the 
time  of  the  first  census,  in  1790,  it  was  only  4.9.  The  density  varies  greatly 
from  one  state  of  the  union  to  another,  and  is  greater  in  the  cities  than  in 
country  districts.  In  Rhode  Island  it  is  407.0  and  in  Nevada  only  0.4  per 
square  mile. 


RAW   MATERIALS  91 

no  hope  of  discovering  new  worlds.  Before  half  a  century 
has  elapsed,  the  last  vacant  spot  doubtless  will  be  taken  into 
possession,  and  the  last  boundary  line  will  be  drawn.  Then 
the  human  race  will  have  to  content  itself  with  fifty-two 
million  square  miles  of  land  area,  without  the  hope  of  ever 
increasing  it  by  new  conquests  or  discoveries ;  and  our  only 
consolation  will  be  to  repeat  the  line  that  Regnard,  with  a 
pride  scarcely  justified,  wrote  on  a  rock  in  Lapland  :  — 

"  Hie  stetimus  tandem  nobis  ubi  defait  orbis." 

III.    Raw  Materials 

The  inorganic  substances  that  compose  the  earth's  crust, 
and  the  organic  substances  due  to  plant  and  animal  life  on 
its  surface,  supply  industry  with  the  raw  materials  that  are 
indispensable  to  all  wealth  and  that  form  its  basal  element. 
Some  of  the  necessary  raw  materials  nature  has  spread  about 
with  lavish  profusion,  while  others  she  has  given  but  spar- 
ingly. Even  those  that  exist  in  large  quantities  may  be 
scarce  in  certain  regions.  Drinking  water  is  generally  men- 
tioned as  an  example  of  superabundant  wealth  ;  yet  nearly 
all  great  cities  find  the  supply  of  water  insufficient,  and 
resort  to  expensive  engineering  works  to  procure  it.  Only 
one  substance  is  everywhere  provided  in  unlimited  quantities, 
viz.,  air.  But  when  we  are  in  quest  of  special  qualities  of 
healthfulness,  coolness,  or  warmth  in  the  air,  then  it  cannot 
be  said  to  be  equally  at  every  one's  disposal.  If  at  Newport, 
Bar  Harbor,  and  any  other  celebrated  seaside  resorts  a  foot 
of  land  commands  a  high  price,  it  is  not  because  people  are 
willing  to  pay  a  high  price  for  the  land  itself,  but  because  of 
the  unequalled  air  and  sunshine  to  be  found  at  these  places. 

Those  materials  that  are  superabundant  but  unequally 
distributed,  human  ingenuity  can  transport  to  places  where 
they  are  lacking.  It  is  for  this  reason  that  transportation 
must  be  regarded  as  an  act  of  production.  But  since  matter, 
owing  to  its  weight  and  inertia,  sometimes  offers  considerable 


92  PRINCIPLES    OF   POLITICAL   ECONOMY 

resistance  to  any  attempt  at  removal,  and  since  the  labor  and 
expense  necessary  for  overcoming  this  resistance  increase  in 
proportion  to  the  distance  to  be  covered,  the  industry  of 
transportation  cannot  entirely  do  away  with  the  inequality 
of  natural  conditions. 

As  for  those  natural  substances  that  exist  in  limited 
quantities,  it  is  possible  that  man,  by  discovering  the  pro- 
cesses of  nature  which  brought  them  forth,  may  actually  re- 
produce them.  We  may  some  day  be  able  to  make  diamonds 
by  crystallizing  carbon  ;  or  if  the  supply  of  coal  should  ever 
become  exhausted,  we  may  succeed  in  extracting  fuel  from 
the  carbonates  of  lime  found  in  large  quantities  in  the  earth's 
crust.  It  is  also  possible  that  we  may  find  substitutes  for 
those  materials  that  are  not  obtainable  in  sufficient  quanti- 
ties. We  sometimes  succeed  in  doing  this,  and  should  al- 
ways succeed  if  our  knowledge  were  wide  enough  ;  for 
there  is  such  an  infinite  variety  of  organic  and  inorganic 
substances  —  many  of  which  possess  similar  characteristics 
— that  they  could  to  a  certain  degree  take  each  other's  place. 

IV.    The  Law  of  Diminishing  Returns 

As  land  and  raw  materials  are  limited  in  quantity,  the 
production  in  which  they  are  the  necessary  factors  also  must 
be  limited.  And  such  is  indeed  the  fact.  Hunting,  which 
played  so  great  a  part  in  primitive  societies,  has  disappeared 
from  the  list  of  productive  industries  in  civilized  countries, 
for  the  very  good  reason  that,  despite  the  regulations  estab- 
lished for  its  protection,  it  has  ceased  to  give  a  satisfactory 
remuneration.  Even  in  the  wilds  of  Africa,  and  in  the 
uninhabited  territories  near  the  poles,  the  hunt  for  elephants, 
ostriches,  beavers,  otters,  and  whales  is  becoming  unprofit- 
able. The  scarcity  of  fish  in  the  seas  which  border  our 
shores  is  a  subject  of  lamentation  for  our  sea  fishermen,  who 
are  now  obliged  to  pursue  fish  out  on  the  high  seas  and  to 
equip  themselves  with  larger  vessels.  The  disappearance  of 


LAW    OF    DIMINISHING   KETUKNS  93 

forests,  and  consequently  of  wood  for  carpentry,  is  an  ac- 
complished fact  in  several  European  countries,  particularly 
England. 

To  be  sure,  there  are  industries  in  which  a  change  of 
processes  may  avert,  for  a  time,  the  threatening  calamity. 
Instead  of  hunting  ostriches,  we  may  raise  them  ;  instead  of 
catching  fish  in  the  seas  or  rivers,  we  may  hatch  them  ;  in- 
stead of  merely  cutting  down  trees,  we  may  at  the  same  time 
plant  them.  This  would  amount  to  changing  these  occupa- 
tions from  simply  extractive  industries  into  productive  ones, 
like  agriculture,  in  which  we  do  not  merely  let  nature  work, 
but  assist  and  guide  her.  There  are,  however,  two  important 
limitations  even  in  agriculture  :  — 

(1)  Agricultural  production  is  limited  by  the  supply  of 
mineral  substances  that  are  indispensable  to  plant-Hfe.     Every 
plot   of   land,  even   the  most  fertile,  contains    only  a  fixed 
amount  of  nitrogen,  potassium,  phosphoric  acid,  etc.     A  part 
of  these  essential  substances  is  removed  with  every  crop  that 
is  raised  on  the  land.     It  is  true  that  the  farmer  aims  not 
only  to  restore  to  the  soil  a  part  of  the  substances  that  each 
harvest  has  removed,  but  also  to  enrich  it  by  adding  new 
substances.     But  it  must  be  borne  in  mind  that  the  sources 
from  which  the  farmer  derives  these  enriching  substances  are 
themselves  limited.      Natural  fertilizers  restore  to  the  soil 
only  a  part  of  what  the  animals  that  pasture  on  it  have  con- 
sumed, and  chemical  fertilizers  consist  of  minerals    (phos- 
phates, nitrates,  guano,  etc.),  the  supply  of  which  is  small 
and  easily  exhaustible. 

(2)  Moreover,  agricultural  production  is  limited  by   the 
time  and  space  necessary  for  vegetable  and  animal  life ;  these 
conditions  are  much  more  rigid,  and  less  subject  to  modifi- 
cation, than  those  of  industrial  production.     The  farmer  is 
reduced  to  an  almost  passive  part  in  production  ;  he  must 
wait  patiently  for  nature  to  accomplish  her  part  of  the  work 
according  to  laws  which  he  knows  but  imperfectly  and  which 
he  cannot  change.     It  takes  months  to  transform  the  seed 


94  PRINCIPLES   OF   POLITICAL   ECONOMY 

into  ears  of  wheat ;  and  it  takes  years  for  the  acorn  to 
become  an  oak.  .  Again,  every  plant  requires  room  in  which 
to  spread  its  roots  and  to  breathe ;  this  space  cannot  be 
restricted.  It  is  different  with  the  industrial  worker.  The 
mechanic  in  his  shop  generally  subjects  matter  to  simple 
transformations  whose  physical  and  chemical  laws  are  much 
less  mysterious  than  those  of  organic  life.  The  proof  of 
this  lies  in  the  fact  that  these  laws  have  been  tamed,  as  it 
were,  and  obliged  to  work  with  mechanical  precision  at  man's 
command.  The  industrial  worker  is  not  tied  down  to  an 
inexorable  succession  of  seasons ;  he  can  ignore  climate  and 
weather,  and  keep  his  machinery  and  furnaces  going  day 
and  night,  summer  and  winter.1 

Doubtless,  there  is  not  a  single  piece  of  land  of  which  the 
farmer  could,  not,  if  need  be,  increase  the  yield.  Only,  after 
a  certain  point  has  been  passed,  he  cannot  do  this  except  at 
an  increased  cost  in  labor.  There  must  consequently  be  a 
point  at  which  the  effort  made  to  increase  the  crop  is  incom- 
mensurate with  the  result. 

Suppose  an  acre  of  land  produces  40  bushels  of  wheat,  and 
that  these  40  bushels  represent  20  days'  labor,  or,  if  we 
prefer  to  express  the  same  thing  in  money,  an  expense  of  |20. 

1  We  may,  nevertheless,  ask  the  question :  Since  the  limitations  encoun- 
tered by  farming  are  due  to  the  fact  that  it  is  concerned  with  living  organisms, 
why  should  we  not  try  to  surmount  this  obstacle  by  courageously  giving  up 
the  assistance  rendered  us  by  the  mysterious  forces  of  animal  and  plant  life, 
and  seek  to  manufacture  food'just  as  a  scientist  manufactures  chemical  sub- 
stances ?  All  the  tissues  of  living  beings,  animals  or  plants,  are  made  up 
almost  exclusively  of  oxygen,  hydrogen,  nitrogen,  carbon,  and  mineral  salts. 
All  these  materials  exist  in  superabundant  quantities  in  the  earth's  crust  and 
in  the  atmosphere.  The  problem,  therefore,  seems  to  be  theoretically  solva- 
ble ;  in  fact,  some  chemists  believe  that  we  are  on  the  verge  of  its  practical 
solution.  If  chemists  should  ever  succeed  in  solving  it,  they  will  have  dis- 
covered more  than  the  solution  of  a  chemical  problem,  or  even  the  problem 
of  Life  ;  they  will  have  found  the  solution  of  the  social  problem,  or,  at  least, 
they  will  have  revolutionized  all  the  laws  of  economics.  For  if  food  could 
be  manufactured,  agriculture  would  be  useless,  and  man  would  use  the  earth 
merely  to  walk  and  build  on.  Every  small  piece  of  land  could  then  feed  a 
population  as  dense  as  that  of  the  most  populous  quarters  of  our  large  cities. 


LAW   OF    DIMINISHING    RETURNS  95 

To  make  an  acre  produce  twice  as  much  wheat  (i.e.  80 
bushels),  more  than  40  days  of  labor  or  more  than  $40  of 
expenditure  would  be  necessary.  To  double  the  product  it 
would  be  necessary  to  triple,  perhaps  to  quadruple,  the  labor 
and  expense.  This  fact  is  expressed  by  the  law  of  dimin- 
ishing returns*  according  to  which  the  returns  are  not 
directly  proportionate  to  the  increased  expenditure  of  labor 
or  capital.1 

This  law  is  certainly  borne  out  by  the  experience  of  every 
day.  Ask  an  intelligent  farmer  whether  his  land  could  not 
produce  more  than  it  does.  He  will  reply  :  "  Certainly, 
the  wheat  crop  would  be  larger  if  I  chose  to  use  more 
manure,  to  apply  more  thorough  labor,  to  clear  the  land  of  the 
smallest  weeds,  to  have  the  earth  carefully  dug  up  by  manual 
labor,  to  use  the  hoe  more  thoroughly,  and  to  protect  the  har- 
vest from  insects,  birds,  and  parasitical  weeds."  Then  ask 
him  why  he  does  not  do  all  this,  and  he  will  reply  that  it 
would  not  pay  ;  the  increase  of  crops  would  cost  more  than 
it  would  be  worth.  There  is  therefore  in  the  output  of  any 
piece  of  land  a  point  of  equilibrium  which  marks  the  limit, 
not  beyond  which  it  is  impossible  to  pass,  but  beyond  which 
no  one  cares  to  pass  because  there  is  no  advantage  in  doing  so.2 

If  things  were  not  as  they  are  in  this  respect,  if  we  could 
increase  the  crop  of  a  given  piece  of  land  indefinitely,  upon 
the  sole  condition  of  proportionately  increasing  labor  and 
expenditure,  the  tillers  of  the  soil  would  not  hesitate  to  do 
this  :  instead  of  increasing  the  size  of  their  farms,  they 

1  It  is,  of  course,  true  that  improved  methods  of  cultivation  may  for  a  time 
put  off  the  point  of  diminishing  returns. 

2  It  may  appear  strange  to  speak  of  the  limitations  of  agricultural  produc- 
tion at  a  time  when  the  superabundance  of  farming  products  is  such  that  Euro- 
pean farmers  are  complaining,  and  governments  in  Europe  feel  called  upon 
to  protect  them  by  customs  duties  excluding  foreign  cereals,  cattle,  etc.     But 
this  may  be  said  to  be  an  accident,  due  to  the  recent  cultivation  of  large  areas 
in  new  countries  with  sparse  populations,  on  which  extensive  cultivation  is 
easily  practised  because  land  is  cheap  and  abundant.      This  fact  explains  the 
postponement  of  one  effect  of  the  law  of  diminishing  returns,  and  its  tempo- 
rary suspension,  but  it  does  not  abrogate  the  law. 


96  PRINCIPLES   OF  POLITICAL   ECONOMY 

would  reduce  them  to  the  smallest  possible  area,  because  the 
smaller  the  area  the  easier  it  is  to  manage  a  farm.  But 
in  this  event  the  earth's  surface  would  be  entirely  different 
from  what  it  is.  The  simple  fact  that  things  are  not  as  we 
have  just  supposed,  and  that  poorer  and  less  favorably  situ- 
ated land  is  in  fact  constantly  brought  under  cultivation, 
demonstrates  that  in  reality  we  cannot  expect  a  piece  of  land 
under  given  conditions  to  yield  more  than  a  limited  crop. 
(See  the  section  on  Rent.) 

V.   Motive  Forces 

"We  have  explained  that  production  consists  in  changing 
the  place  or  the  form  of  matter.  The  resistance  offered  by 
matter  to  these  changes  may  sometimes  be  considerable,  and 
man's  muscular  energy  is  not  very  great.  In  all  times, 
therefore,  and  especially  since  the  abolition  of  slavery  has 
made  it  impossible  to  employ  the  strength  of  his  fellows, 
man  has  endeavored  to  supplement  his  strength  by  using 
the  motive  forces  provided  by  nature.  There  are  not  very 
many  of  them,  and  they  have  often  been  overestimated. 
There  are  really  only  four  or  five  which  man  has  been  able 
to  utilize  in  production  :  the  muscular  energy  of  animals,  the 
propelling  power  of  wind  and  of  water,  the  expansive  power 
of  vapors  (especially  of  steam),  and  recently,  although  thus 
far  in  a  small  measure,  electricity.  Man  makes  use  of  these 
natural  forces  by  means  of  machinery.  Machines  are  only 
tools,  with  the  difference  that  most  tools  are  manipulated  by 
hand,  whereas  machines  are  worked  by  natural  forces,  such 
as  waterfalls  and  steam.1  Now  it  is  a  difficult  problem  to 

1  When  the  instruments  worked  by  man  are  complicated,  they  are  some- 
times also  called  machines,  e.g.  sewing-machines  ;  but  this  terminology  is 
not  correct.  Besides,  tools  and  implements  can  also  multiply  the  power  of 
man.  Aided  by  a  hydraulic  press,  a  child  can  exert  a  pressure  that  is  theo- 
retically unlimited.  With  a  lever  and  a  place  on  which  to  rest  it,  Archimedes 
could  have  moved  the  world.  Yet  it  has  been  calculated  that  had  Archimedes 
found  this  necessary  point  of  support,  and  worked  several  millions  of  years, 
he  could  have  raised  the  world  only  a  few  inches  ;  for  a  law  of  mechanics 


MOTIVE   FORCES  97 

utilize  natural  forces  and  make  them  turn  wheels,  propel 
planes,  or  work  shuttles. 

Much  has  been  written  of  the  importance  of  farm  machin- 
ery in  the  economics  of  agriculture,  but  the  fact  is  too  often 
overlooked  that  the  machinery  is  valueless  unless  driven  by 
some  other  power  than  human  muscle.  The  power  of  steam 
and  of  falling  water  applied  through  the  agency  of  the  steam- 
engine  and  the  water-wheel  gives  great  effectiveness  to  labor 
in  factories.  The  corresponding  power  of  the  farm  at  the 
present  time  is  principally  that  of  horses  and  mules,  although 
in  California,  Hawaii,  and  Louisiana  the  steam-engine  is 
used  to  a  limited  extent  in  ploughing  and  in  transporting 
cane  from  the  fields  to  the  sugar-houses.1 

In  our  manufactures  the  four  important  motive  forces  are 
steam,  water,  electricity,  and  gas.  Steam,  which  in  1870 
furnished  51.8  per  cent  of  the  motive  power  for  manufac- 
tures, now  supplies  77.4  per  cent.  Water-wheels,  which  in 
1870  provided  48.2  per  cent,  now  furnish  only  15.3  per  cent. 
Electric  motors  in  1890  represented  only  three-tenths  per 

teaches  that  every  gain  of  power  is  counterbalanced  by  a  loss  of  speed. 
With  the  aid  of  mechanical  devices  a  man  may  be  enabled  to  lift  a  thousand 
times  as  much  as  he  can  lift  with  his  arms,  unaided  ;  but  it  takes  a  thousand 
times  as  long  to  do  it.  Now,  as  time  is  valuable,  the  advantage  resulting 
from  the  use  of  implements  is  practically  restricted.  When,  however,  ma- 
chines are  operated  by  means  of  natural  forces,  there  is  no  limit  to  the  increase 
of  power. 

There  are  vessels  that  have  machinery  capable  of  producing  30,000  horse- 
power, which  is  equivalent  to  the  strength  of  300,000  rowers,  or  even  900,000, 
as  it  would  be  necessary  to  have  three  relays  every  twenty-four  hours.  These 
rowers  could  propel  such  a  vessel  three  or  four  miles  an  hour,  whereas 
modern  methods  secure  a  speed  of  25  to  30  miles.  Assuming  that  such  a 
vessel  as  this  employs  200  men,  the  power  of  each  may  then  be  said  to  be 
multiplied  by  4500  through  the  use  of  modern  propulsive  machinery. 

The  Sunday  editions  of  some  of  our  newspapers  contain  more  printed 
matter  than  this  whole  volume.  If  the  amount  were  the  same,  the  circula- 
tion only  100,000,  and  all  the  work  had  to  be  done  in  writing  in  the  same 
time  now  occupied  by  printing  (i.e.  about  four  hours),  three  million  persons 
would  be  required  to  publish  such  a  paper. 

1  In  1900  there  were  in  the  United  States  5,739,657  farms,  having  a  total 
of  21,646,731  horses,  mules,  and  asses. 


98  PRINCIPLES   OF   POLITICAL   ECONOMY 

cent,  and  now  they  produce  2.7  per  cent  of  the  power  used 
in  manufactures.  In  1890  the  gas-engines  used  in  manufac- 
turing produced  only  one-tenth  of  one  per  cent  of  the  total 
power  utilized,  whereas  in  1900  they  furnished  1.3  per  cent.1 

A  few  decades  ago  the  use  of  power  in  any  considerable 
quantity  was  limited  practically  to  manufacturing  opera- 
tions; but  within  the  last  ten  or  twelve  years  the  use  of 
electricity  for  lighting  and  for  the  operation  of  street  rail- 
ways has  developed  enormously.  During  1900  there  were 
over  twelve  hundred  electric  railway  lines  in  operation  in 
the  United  States,  and  over  thirty-three  hundred  central 
stations  for  the  distribution  of  electric  current  for  lighting 
and  power  purposes.  The  modern  office  building,  often 
housing  a  population  equal  to  that  of  a  small  town,  is  almost 
wholly  a  creation  of  the  past  ten  years,  and  the  power 
required  in  these  great  structures,  not  only  for  lighting 
purposes,  but  for  the  operation  of  elevators,  pumping  water, 
compressing  air,  and  operating  refrigerating  and  ventilating 
machinery,  forms  a  large  item  when  the  number  of  these 
buildings  in  the  United  States  is  taken  into  consideration.2 

The  use  of  electricity,  moreover,  •  as  an  agency  for  the 
transformation  and  transmission  of  the  energy  developed  by 
falling  water,  has  entirely  changed  the  conditions  under 
which  such  primary  power  can  be  utilized  to  advantage. 
The  practical  possibility  of  transmitting  power  thus  devel- 
oped over  long  distances  has  removed  the  necessity  of  build- 
ing mills  adjacent  to  water  powers.  Again,  the  use  of  steam 
power,  either  directly  applied  or  electrically  transmitted,  is 
becoming  more  and  more  general  in  mining  and  quarrying, 
in  public  works  of  every  description,  in  the  sinking  of 

1  According  to  the  Twelfth  Census  of  the  United  States,  the  aggregate 
motive  power  employed  in  our  manufacturing  establishments  in  1900  was 
11,300,081  horse-power,  as  compared  with  6,954,655  horse-power  in  1890, 
3,410,837  horse-power  in  1880,  and  2,346,142  in  1870. 

2  Very  interesting  data  regarding  the  new  uses  of  power,  and  especially  of 
electricity,  are  given  in  Vol.  VII  of  the  Twelfth  Census,  from  which  nearly 
all  of  the  above  facts  are  taken. 


MOTIVE   FORCES  99 

foundations,  in  the  erection  of  buildings,  and  in  nearly  every 
branch  of  industry.  Thus  the  amount  of  power  used  apart 
from  manufacturing  operations  is  increasing  rapidly. 

It  should  be  noted  that  the  more  powerful  these  natural 
forces  are,  the  more  time  and  trouble  it  has  taken  man  to 
utilize  them  and  make  them  subservient  to  his  purposes. 
Their  resistance  increases  with  their  power.  The  "  harness- 
ing "  of  Niagara  Falls,  for  example,  was  so  stupendous  an 
undertaking  that  our  forefathers,  scarcely  conceiving  its  pos- 
sibility, left  it  for  modern  engineering  to  accomplish. 

The  domestication  of  various  animals  —  such  as  the  horse, 
camel,  ox,  elephant,  reindeer,  and  Esquimau  dog  —  supplied 
man  with  the  first  natural  force  for  carriage,  draught,  and 
tillage.  This  was  an  important  conquest,  for  animals  are 
relatively  stronger  than  men.  A  horse's  strength  is  esti- 
mated at  six  or  seven  times  that  of  man,  and  the  food  a  horse 
requires  is  by  no  means  of  greater  cost.  But  the  number  of 
horses  in  a  country  is  limited,  especially  in  countries  with  an 
increasing  population,  for  they  require  considerable  space 
whence  to  obtain  food  ;  therefore  the  motive  force  they  af- 
ford is,  in  populous  countries,  of  comparatively  little  account. 

The  motive  force  of  wind  and  water  has  always  been  used 
for  transportation,  but  its  industrial  application  has  until  re- 
cently been  confined  to  turning  windmills  and  water-wheels. 

The  expansive  power  of  gases,  or  rather  the  heat  gen- 
erated by  combustion,  (of  which  this  force  is  only  a  transfor- 
mation,) is  artificial  in  the  sense  that  it  is  not  created  by 
nature,  but  by  man.  For  this  reason  it  possesses  inestimable 
advantages.  Man  can  generate  it  where  he  pleases,  when  he 
pleases,  and  in  the  manner  and  quantity  that  suit  him.  It 
is  mobile,  portable,  continuous,  great  or  small  according  to 
demand.  The  power  of  steam  can  be  raised  to  many  times 
the  atmospheric  pressure  ;  theoretically,  at  least,  there  is  no 
assignable  limit  to  the  possibilities  of  its  increase.1 

1  Water  heated  to  516  degrees  Centigrade  —  not  an  exceedingly  high  tem- 
perature —  should  develop  a  pressure  of  1,700,000  atmospheres,  which  is  more 


100  PRINCIPLES   OF   POLITICAL   ECONOMY 

The  prehistoric  inventor  whose  name  will  remain  forever 
unknown,  but  whom  the  gratitude  of  mankind  has  deified  as 
Prometheus,  who  first  caused  a  spark  to  spring  from  the  fric- 
tion of  two  pebbles,  never  suspected  when  he  looked  on  this 
flame,  which  was  probably  due  far  more  to  chance  than  to  his 
genius,  what  a  marvellous  power  he  was  granting  to  human 
industry.  Fire  ministered  first  of  all,  no  doubt,  only  to  the 
humble  wants  of  domestic  life.  Later  it  was  used  for  the 
extraction,  the  founding,  and  working  of  metals.  Its  utiliza- 
tion as  a  motive  force  dates  from  the  time  that  men  dis- 
covered the  explosive  power  a  spark  could  communicate  to 
some  substances,  e.g.  gunpowder  ;  and  in  this  form  it  is  still 
employed  not  only  to  hurl  projectiles  for  a  mile  or  two,  but 
also  to  bore  tunnels  and  break  rocks.  But  it  was  not  until 
Newcomen,  in  1705,  and  James  Watt,  in  1769,  used  it  for 
producing  steam  in  a  closed  reservoir,  and  thus  created  the 
wonderful  instrument  of  modern  industry  which  we  call  the 
steam-engine,  that  fire,  or  rather  heat,  became  the  guiding 
spirit  of  industry.1 

We  are  therefore  justified  in  asking,  with  some  degree 
of  anxiety,  what  will  become  of  human  industry  when  the 
supply  of  coal  runs  short  and  our  fires  must  be  extinguished  ? 
Probably  we  shall  then  return  to  the  forces  of  nature  and 
learn  to  make  better  use  of  them.  Already  we  have  begun 
to  do  this.  Much  has  been  said  recently  of  the  "  white  coal," 
which  consists  of  glaciers ;  the  water  that  runs  from  them  in 
torrents  has  been  made  to  propel  water-wheels  and  is  thus 

than  sufficient  to  lift  the  Himalaya  Mountains.    The  only  difficulty  would  be 
to  find  some  means  of  containing  this  pressure. 

1 1  call  the  steam-engine  a  wonderful  instrument  because  of  the  services 
it  has  rendered.  But  in  reality  it  is  a  very  defective  device.  It  utilizes  only 
a  small  part,  at  most  a  tenth,  of  the  heat  generated  by  the  combustion  of  coal. 
Much  of  it  is  lost  from  the  furnace  to  the  boiler,  and  some  between  the  boiler 
and  the  engine  proper.  Hence  the  remark  made  by  a  well-known  French 
engineer,  Le  Bon,  "  I  hope  that  before  twenty  years  have  passed,  the  last 
specimen  of  this  rude  machine  will  have  taken  its  proper  place  in  museums, 
side  by  side  with  the  stone  hatchets  of  our  primitive  ancestors. " 


MOTIVE   FORCES  101 

used  to  manufacture  paper.  In  the  mountainous  regions  of 
Savoy,  Switzerland,  and  Italy,  hydraulic  energy  produces  sev- 
eral thousand  horse-power,  which  is  employed  in  producing 
electricity  and  in  manufacturing  aluminum  and  carburetted 
calcium.  Elsewhere  the  same  power  is  employed  to  furnish 
illumination  for  towns  or  motive  force  for  street  railways. 

Progress  in  this  direction  probably  has  been  as  rapid  in  the 
United  States  as  anywhere  else.  Here  electrical  transmission 
has  rendered  possible  the  advantageous  utilization  of  water 
power  in  several  distinctly  new  forms,  such  as  :  the  large 
central  stations  for  distributing  power  to  numerous  plants ; 
the  use  of  remote  mountain  water  powers  for  the  operation 
of  single  plants,  often  many  miles  distant,  of  which  so  many 
notable  examples  are  to  be  found  in  the  far  West  ;  and  the 
more  advantageous  use  of  larger  streams  on  the  Atlantic 
coast,  usually  in  closer  proximity  to  the  mills,  but  under 
conditions  which  would  present  many  difficulties  without  the 
useful  agency  of  the  electrical  current. 

The  development  of  electric  power  transmission  at  Niagara 
Falls  has  been  the  largest  and  most  conspicuous  of  its  kind, 
although  as  to  the  length  of  transmission  and  the  voltage 
at  which  the  current  is  sent  over  long  distances  it  is  by  no 
means  the  best  example  that  can  be  found.  There  are  two 
separate  and  distinct  enterprises  on  the  American  side  of  the 
Falls,  one  of  which  has  an  ultimate  capacity  of  one  hundred 
thousand  horse-power.  The  potential  power  of  the  main 
stream  is  estimated  to  be  equal  to  at  least  six  or  seven 
million  horse-power.1 

1  A  large  amount  of  Niagara  current  is  employed  in  electro-chemical  and 
electro-metallurgical  operations.  In  the  immediate  vicinity  of  the  Falls  the 
current  is  now  used  for  electric  lighting,  and  about  one  thousand  horse-power 
is  also  delivered  to  the  street  railway  trolley  system.  Factories  on  the  spot, 
working  up  raw  material  into  food,  textile  fabrics,  etc.,  utilize  several  hundred 
horse-power,  and  the  current  is  also  used  for  the  manufacture  of  "merry-go- 
rounds,"  as  well  as  for  operating  ventilating  blowers  in  the  public  schools. 

The  current  is  carried  from  Niagara  to  Buffalo  for  use  by  the  street  railway 
system,  so  that  at  all  hours  of  the  day  and  night  Niagara  is  transporting  the 
public  of  a  great  city  more  than  twenty  miles  distant.  Current  from  the  same 


102  PRINCIPLES    OF   POLITICAL   ECONOMY 

It  is  certain  that  in  glaciers  and  in  all  running  waters  there 
are  almost  unlimited  quantities  of  stored-up  energy.  It  has 
been  estimated  that  the  motive  force  of  the  streams  of  France 
alone  amounts  to  thirty  million  horse-power  —  an  amount  of 
physical  energy  almost  equivalent  to  that  of  all  men  of  work- 
ing ages  in  the  entire  universe.  The  waves  which  the  wind 
causes  on  the  surface  of  the  seas,  or  the  rising  tide  which  twice 
every  day  presses  against  thousands  of  miles  of  coast-line, 
really  constitute  inexhaustible  stores  of  motive  power.  Un- 
fortunately, these  forces  of  nature,  which  might  lift  the  world, 
still  seem  too  savage  and  too  untamable  to  be  controlled.  But 
if  they  could  be  transformed  into  electricity,  the  energy  they 
provide  might  be  made  transportable  and  divisible.  The  cur- 
rent of  the  Rhone  River,  which  has  uselessly  expended  itself 
in  wearing  away  pebbles,  is  now  employed  to  work  the  looms 
of  the  Lyons  silk  factories.  Motive  force  is  at  present  dis- 
tributed to  the  small  establishments  that  require  it,  just  like 
water  and  gas ;  the  mere  turning  of  a  spigot  or  pressing  a 
button  is  sufficient  to  obtain  it.  Very  lately  it  has  been  sug- 
gested to  draw  from  the  source  of  all  energy  —  the  sun  itself 
—  all  the  heat  we  require.  But  even  admitting  that  this  could 
be  done,  the  force  borrowed  from  the  sun  would  —  more  than 
any  other  natural  force  —  have  the  disadvantage  that  we 
should  probably  be  unable  to  develop  it  wherever,  whenever, 
and  to  the  extent  that  we  want  it.  The  sun  does  not  shine 
everywhere  nor  always.  If  ever  England  should  depend  on 
it  to  work  her  factories,  what  a  terrible  calamity  this  would 

source  is  used  in  several  miscellaneous  industries  at  prices  which  compete  so 
favorably  with  those  of  steam,  oil,  natural  and  artificial  gas,  that  the  demand 
is  rapidly  increasing. 

Electric  current  is  now  transmitted  from  the  Sierras,  in  eastern  California, 
as  far  as  San  Francisco  ;  this  constitutes  the  longest  electric  power  transmis- 
sion in  the  world,  the  distance  being  about  two  hundred  miles.  The  employ- 
ment of  this  current  is  not  less  varied  than  at  Niagara,  ranging  from  the 
operation  of  street  cars  in  Oakland  to  the  running  of  a  flour  mill  at  Stockton, 
and  from  use  in  mines  in  various  parts  of  the  state  to  use  in  miscellaneous 
industries  at  Sacramento,  Benicia,  San  Jose,  and  elsewhere. 


ILLUSIONS   CONCERNING   MACHINERY  103 

involve  for  that  nation  !  The  fogs  of  the  North  Sea  would 
become  her  shroud.  Men  would  then  be  obliged  to  build 
their  industrial  centres  in  the  heart  of  the  Sahara  desert, 
where  the  sun  shines  most  hotly  and  most  steadily. 

VI.    The  Illusions  to  which  Machinery  has  given  Rise 

Ambitious  hopes  have  been  aroused  by  the  marvellous 
effects  of  the  use  of  machinery  propelled  by  the  forces  of 
nature.  It  seems  almost  as  though  we  may  some  day  be 
liberated  from  the  necessity  of  working  to  gain  a  living. 
Some  persons  have  estimated  that  four  hours  of  labor,  or 
perhaps  even  two  hours,  or,  according  to  a  socialistic  calcula- 
tion, one  hour  and  twenty  minutes  per  day,  would  suffice  to 
produce  more  wealth  than  is  necessary  to  satisfy  all  our 
wants. 

The  manufactures  of  the  United  States  were  in  1900  car- 
ried on  very  extensively  by  means  of  steam,  water,  gas,  and 
electric  power ;  according  to  the  census  of  manufactures  of 
that  year  over  11,300,000  horse-power  was  produced  by  ma- 
chinery thus  propelled.  As  each  horse-power  is  equivalent 
to  the  muscular  energy  of  six  men,  it  would  have  required 
67,800,000  men  to  furnish  this  amount  of  power.  The  man- 
ufacturing industries  of  the  nation  were,  however,  really 
carried  on  by  less  than  6,000,000  persons.  In  1902,  more- 
over, there  were  nearly  40,000  locomotives  in  the  country. 
To  have  done  the  work  of  these  locomotives  upon  the  com- 
mon roads  of  the  country  there  would  have  been  required,  in 
round  numbers,  76,000,000  horses  and  19,000,000  men.1  But 
all  the  railroads  of  the  country  were  operated  by  only  one 
million  persons.  To  have  done  the  work,  then,  accomplished 
by  power  and  power  machinery  in  our  mechanical  industries 
and  upon  our  railroads  there  would  have  been  required  nearly 
87,000,000  men.  Now  according  to  the  ratio  of  the  census 

1  This  calculation  is  made  on  the  same  basis  as  that  given  by  Carroll  D. 
Wright,  United  States  Commissioner  of  Labor,  in  his  "Outline  of  Practical 
Sociology,"  Fifth  edition,  1902,  p.  120. 


104  PRINCIPLES    OF   POLITICAL   ECONOMY 

of  1900,  87,000,000  men  represent  a  population  of  over 
400,000,000  persons,  which,  if  the  use  of  power  in  manufac- 
tories and  on  the  railroads  were  discontinued,  would  have  to 
be  added  to  our  present  population  of  76,000,000. 

If  in  addition  to  the  above-mentioned  uses  of  power  ma- 
chinery, we  consider  its  extension  to  many  fields  of  applica- 
tion in  which  its  use  was  previously  unknown,  we  shall  be 
ready  to  admit  that  the  power  machinery  used  in  the  various 
industries  of  the  nation  has  multiplied  each  workman's  pro- 
ductive power  at  least  ten  times  ;  or,  to  employ  a  more  pic- 
turesque metaphor,  we  may  say  that  each  of  them  has  ten 
slaves  at  his  service,  giving  him  a  position  almost  equivalent 
to  that  of  a  Roman  patrician  and  permitting  him  to  add  the 
pleasures  of  wealth  to  those  of  idleness.  As  a  consequence 
of  this  new  slavery  that  takes  the  place  of  the  old,  why  will 
not  the  men  of  the  future  be  able  to  lead  the  noble  life  of 
the  ancient  Greeks  in  the  Agora  or  of  the  Romans  in  the 
Forum;  why  will  they  not  then  be  able  to  consecrate  to  politi- 
cal life,  to  artistic  amusements,  to  gymnastic  exercises,  or  to 
elevated  mental  speculations,  the  hours  that  were  previously 
devoted  to  manual  labor,  —  with  the  sole  difference  that  what 
was  formerly  the  privilege  of  the  few  will  become  the  lot 
of  all? 

This  is  indeed  an  alluring  prospect,  and  the  socialists 
exult  in  it.  It  is  perhaps  unfortunate  that  a  closer  analysis 
dissipates  the  illusion.  Such  a  social  state  as  this  may,  in- 
deed, not  even  be  desirable.  Antique  slavery  was  no  less 
harmful  to  the  masters  than  to  the  slaves,  since  it  led  the 
former  to  lose  all  habit  of  effort  and  all  taste  for  work. 
It  is  to  be  feared,  therefore,  that  the  slavery  of  natural 
forces  would  have  similarly  disastrous  effects  on  the  men  of 
the  twentieth  century.  They,  too,  might  in  the  course  of 
time  have  no  ideal  but  that  of  the  degenerate  Romans: 
panem  et  cir censes. 

Furthermore,  an  analysis  of  the  above  fantastic  prophecies 
will  show  that  these  hopes  are  greatly  exaggerated.  The 


ILLUSIONS    CONCERNING   MACHINERY  105 

larger  part  of  the  mechanical  energy  used  in  modern  indus- 
trial life  is  applied  exclusively  to  transportation,  by  means 
of  steamboats  and  locomotives.  Machinery  does,  to  be  sure, 
multiply  our  productive  energy ;  but  a  large  number  of  work- 
men are  employed  both  in  producing  it  and  in  attending  to  it 
while  in  use.1  Steam  has,  of  course,  effected  a  revolution  by 
almost  removing  the  difficulties  of  transporting  passengers, 
exchanging  goods,  communicating  ideas,  and  by  developing 
the  solidarity  of  mankind.  From  this  point  of  view  it  has 
performed  an  ethical  service  the  importance  of  which  can- 
not be  exaggerated.  But  it  would  hardly  be  true  to  say 
that  steam,  when  applied  to  transportation,  has  multiplied 
products.2 

The  goods  an  increase  of  which  could  cause  a  notable  im- 
provement in  the  condition  of  mankind  are  agricultural  prod- 
ucts ;  the  first  requisite  of  welfare  is  food,  and,  if  possible, 
good  food  in  abundance.  Yet  this  is  precisely  the  province 
in  which  machinery  has  thus  far  made  but  little  advance. 
Of  the  machines  employed  in  farming,  there  are  few  that 
really  increase  production.  Irrigating  appliances  doubtless  do 

1  Professor  Leroy-Beaulieu  points  out  in  his  "Treatise  on  Political  Econ- 
omy "  that  economic  progress  is  less  great  in  reality  than  in  appearance,  inas- 
much as  a  gross  increase  of  productive  power  is  mistaken  for  a  net  increase. 
Not  only  is  a  great  part  of  mechanical  energy  applied  exclusively  to  transpor- 
tation, but  many  machines  are  used  only  to  manufacture  other  machines  or 
objects  that  are  not  directly  consumable.  Machines,  moreover,  require  a 
large  number  of  workmen  for  their  production,  their  repair,  and  their  man- 
agement. Few  machines  are  utilized  to  the  full  extent  of  their  productive 
capacity,  and  a  large  number  remain  idle  a  great  part  of  the  time.  Again, 
all  the  labor  and  machinery  that  is  used  for  purposes  of  advertising,  making 
samples,  etc.,  cannot  be  regarded  as  really  productive.  Besides,  the  rapid  suc- 
cession of  new  inventions,  discoveries,  and  improvements  leads  to  the  aban- 
donment of  machinery  that  has  been  used  but  a  short  time.  Finally, 
machines  consume  large  amounts  of  coal,  oil,  and  other  materials  whose  pro- 
duction and  transportation  require  the  labor  of  many  persons. 

2  Steam  transportation  multiplies  products  for  the  time  being  by  bringing 
them  from  distant  places ;  but  this  is  clearly  only  a  temporary  state  of  affairs 
due  to  the  fact  that  these  localities  are  still  very  sparsely  populated  and  need 
not  keep  for  their  own  consumption  all  that  they  produce. 


106  PRINCIPLES   OF   POLITICAL  ECONOMY 

increase  crops,  but  threshers  and  most  of  the  other  machines 
simply  economize  human  labor  but  do  not  bring  forth  a 
single  additional  blade  of  wheat.  In  fact,  many  machines 
involve  a  partial  waste  of  the  crop  that  would  have  been 
saved  by  careful  manual  labor.  Is  this  slow  development 
of  machinery1  in  the  food -supply  ing  pursuits  due  only  to  the 
routine  spirit  of  the  farming  classes,  as  many  think,  or  is  it 
due  rather  to  the  nature  of  agriculture  itself?  The  latter 
explanation  seems  to  us  the  true  one.  The  soil  is  the  labo- 
ratory of  Life,  arid  Life  has  forces  that  are  mysterious  and 
recalcitrant. 

There  is  still  another  business  that  is  of  capital  importance 
from  the  viewpoint  of  human  prosperity ;  namely,  the  con- 
struction of  houses.  To  this  branch  of  production  machinery 
is  scarcely  applicable,  save  under  exceptional  circumstances.2 

The  use  of  natural  forces  to  propel  machinery  has  resulted 
in  great  cheapness  and  abundance  only  in  one  field  of  pro- 

JThe  census  of  1900  indicates  that  implements  and  machinery  used  on 
farms  in  the  United  States  represent  only  3.7  per  cent  of  the  value  of  all 
farm  property.  This  is  equivalent  to  an  average  of  90  cents  per  acre  devoted 
to  farming  in  1900,  whereas  in  1890  the  value  was  79  cents  per  acre ;  the 
census  adds,  however,  that  "apart  of  this  increase  is  unquestionably  more 
apparent  than  real." 

An  account  of  the  exceptionally  extensive  use  of  machinery  in  agriculture 
on  the  "bonanza  farms"  of  the  West  is  given  by  William  Allen  White  in 
Scribner^s  Magazine  for  November,  1897,  under  the  title,  "The  Business  of 
a  W.heat  Farm." 

2  There  are  houses  in  sheet- iron  that  may  be  taken  apart  and  transported. 
If  this  method  of  construction  were  to  become  general,  it  would  cause  a  great 
revolution.  Houses  would  again  become  mere  furniture,  as  in  the  patriarchal 
period.  But  at  present  machinery  is  employed  only  in  the  larger  cities  in 
constructing  buildings.  The  result  is  that  comfortable  homes  (with  which 
health,  family  life,  and  morality  are  so  closely  connected)  do  not  increase 
as  rapidly  as  our  need  for  them  ;  the  rent  of  buildings  increases  more  quickly 
than  the  price  of  food. 

It  must,  however,  be  admitted  that  machinery  is  used  quite  extensively  in 
the  construction  of  high  buildings  in  our  large  cities.  Not  only  is  the  entire 
framework  of  these  structures  frequently  made  of  steel,  but  power  tools  are 
used  for  such  diverse  purposes  as  drilling,  blasting  rocks  to  construct  founda- 
tions, cutting  stones,  etc.,  — all  of  which  are  elements  in  the  cost  of  buildings. 


MACHINERY    AND   THE   LABORER  107 

ductive  activity ;  namely  in  manufacturing.  In  this  branch 
it  has  gone  even  beyond  our  hopes,  since  it  causes  a  super- 
abundance and  obliges  great  industrial  producers  to  combine 
for  the  purpose  of  restricting  the  output. 

Finally,  we  must  blame  machinery  for  the  crises  produced 
by  a  superabundance  —  an  overproduction  —  of  goods  ;  we 
must  blame  it  for  the  barrack  system  of  factories  that  marks 
modern  industry,  and,  above  all,  for  the  constant  failure  of 
many  workers  to  find  employment.  The  last  of  these  effects 
is  the  most  remarkable  result  of  the  use  of  machines ;  it 
has  aroused  the  bitter  opposition  of  the  working  classes  to 
the  introduction  of  labor-saving  (and  consequently  labor- 
supplanting)  machinery. 

It  scarcely  seems  necessary  to  multiply  examples  of  the 
economy  in  labor  effected  in  some  branches  of  production  by 
the  introduction  of  machinery,  so  often  has  this  fact  been 
emphasized  and  discussed.1  There  is,  moreover,  no  cause  for 

1The  following  facts  are  taken  from  the  First  Annual  Report  of  the 
United  States  Commissioner  of  Labor  for  1886 :  In  the  timber  business 
12  laborers  with  a  Bucker  machine  will  dress  12,000  staves.  The  same 
number  of  men  by  hand  labor  would  have  dressed  in  the  same  time  only 
2500.  In  the  manufacture  of  paper  a  machine  now  used  for  drying  and 
cutting,  run  by  4  men  and  6  girls,  will  do  the  work  formerly  done  by  100 
persons,  and  do  it  much  better.  In  the  manufacture  of  wall  paper  the  best 
evidence  puts  the  displacement  in  the  proportion  of  100  to  1.  In  a  phosphate 
mine  in  South  Carolina  10  men  accomplish  with  machinery  what  100  men 
handle  without  it  in  the  same  time.  There  has  been  a  displacement  of  50 
per  cent  in  the  manufacture  of  rubber  boots  and  shoes.  In  South  Carolina 
pottery  the  product  is  10  times  greater  by  machine  processes  than  by 
muscular  labor.  In  the  manufacture  of  saws,  experienced  men  consider 
that  there  has  been  a  displacement  of  3  men  out  of  5.  In  the  weaving  of  silk 
the  displacement  has  been  95  per  cent,  and  in  the  winding  of  silk  90  per  cent. 
A  large  soap-manufacturing  concern  carefully  estimates  the  displacement  of 
labor  in  its  works  at  50  per  cent.  In  making  wine  in  California  a  crushing 
machine  has  been  introduced  with  which  1  man  can  crush  and  stem  80  tons 
of  grapes  in  a  day,  representing  an  amount  of  work  formerly  requiring  8  men. 
In  woollen  goods  modern  machinery  has  reduced  muscular  labor  33  per  cent 
in  the  carding  department,  50  per  cent  in  the  spinning,  and  25  per  cent  in  the 
weaving.  In  some  kinds  of  spinning  100  to  1  represents  the  displacement. 

Further  data  of  the  same  nature  may  be  found  in  Carroll  D.  Wright, 


108  PRINCIPLES    OF   POLITICAL   ECONOMY 

surprise  in  the  frequent  occurrence  of  labor  agitation  against 
the  introduction  of  machinery  ;  the  industrial  history  of  the 
last  few  centuries  is  full  of  examples  not  only  of  popular 
animadversion  but  of  actual  violence  toward  those  who  are 
held  responsible  for  its  invention.  In  the  sixteenth  century 
the  city  of  Dantzig  prohibited  the  introduction  of  ribbon 
looms,  and  the  inventor  of  them  was  drowned  by  the  en- 
raged populace.  Jacquart,  the  inventor  of  a  weaving  loom, 
three  times  came  near  being  killed  by  the  people  of  Lyons. 
Hargreaves  was  persecuted  by  the  workers  in  England.  In 
1811  a  party  of  English  laborers  called  Luddites  destroyed 
newly  invented  machinery  in  the  northern  and  midland 
counties,  and  were  only  suppressed  by  military  force.  A 
former  president  of  Mexico,  Santa  Anna,  opposed  the  plan 
to  build  a  railroad  because  it  would  deprive  the  muleteers  of 
their  employment.1 

The  direct  advantages  of  machinery  which  political  econo- 
mists have  generally  pointed  out  are  principally  the  follow- 
ing :  — 

(1)  Machinery  diminishes  the  strain  on  human  muscles 
and  relieves  men  of  the  grievous  fatigue  which  not  very  long 
ago  made  them  prematurely  old.     It  does  away  with  the  dis- 
gust of  many  kinds  of  labor  that  were  formerly  exceedingly 
distasteful. 

(2)  Machines  permit  the  employment  of  workers  of  aver- 
age strength  and  ability  for  tasks  that  formerly  required  an 
exceptional  degree  of  one  or  both. 

(3)  Machines   perform   work   much   more   rapidly   than 
would  otherwise  be  possible. 

"Industrial  Evolution  of  the  United  States,"  Chapter  27;  J.  A.  Hobson, 
"  Evolution  of  Modern  Capitalism  "  ;  the  article  on  Machinery  in  Bliss, 
"  Encyclopaedia  of  Social  Reform  "  ;  and  the  Thirteenth  Annual  Report  of 
the  United  States  Commissioner  of  Labor,  which  is  devoted  entirely  to  the 
subject  of  Hand  and  Machine  Labor. 

1Many  incidents  of  the  same  nature  may  be  found  in  Roscher's 
"  Nationaloekonomik  des  Handels  und  Gewerbefleisses. "  The  Luddite  riots 
are  referred  to  by  Green,  "  History  of  the  English  People,"  Vol.  IV,  p.  377. 


MACHINERY   AND    THE   LABORER  109 

(4)  Machinery  excels,  both  in  the  performance  of  exceed- 
ingly great  tasks  and  in  the  accomplishment  of  exceptionally 
delicate   ones.      There   are    trip-hammers  weighing   several 
tons  that  strike  three  hundred  blows  a  minute,  as  well  as 
delicate  devices  that  could  crack  an  eggshell  without  crush- 
ing it.     There  are  engines  of  ten  thousand  horse-power,  on 
the  one  hand,  and,  on  the  other  hand,  dividing  machines  that 
can  cut  an  inch  into  ten  thousand  equal  parts. 

(5)  Machinery  performs  the  monotonous  work  and  lessens 
the  monotony  of  life.     "  Nothing  could  be  more  narrow  or 
monotonous  than  the  occupation  of  a  weaver  of  plain  stuffs 
in  the  old  time.     But  now  one  woman  will  manage  four  or 
more  looms,  each  of  which  does  many  times  as  much  work  in 
the  course  of  the  day  as  the  old  hand  loom  did;  and  her 
work  is  much  less  monotonous  and  calls  for  more  judgment 
than  his  did." -  — MARSHALL,  "Economics  of  Industry." 

(6)  Machinery  permits  the  production  of  a  large  number 
of  exactly  identical  pieces  or  products,  and  thus  gives  rise  to 
the  modern  system  of  "interchangeable  parts,"  permitting 
the  broken  parts  of  machines  to  be  replaced   at   once  by 
exactly  similar  pieces.     Were  this  not  possible,  the  broken 
parts  of  a  machine  could  be  replaced  only  at  great  cost,  by 
sending  them   back  to  the  manufacturer  or  by  bringing  a 
highly  skilled  mechanic  to  the  machine. 

(7)  Machinery  weakens   the   barriers  between  different 
trades,  because  many  machines  which  are  in  use  in  one  in- 
dustry are  similar  in  general  character  to  those  used  in  many 
other  industries.     "  Most  of  the  operatives  in  a  watch  factory 
would  find  machines  similar  to  those  with  which  they  are 
familiar  if  they  strayed  into  a  gun-making  factory  or  sewing- 
machine  factory,  or  a  factory  for  making  textile  machinery  " 
(Marshall,  as  above). 

But  the  problem  of  machinery,  viewed  in  its  widest  and 
fullest  significance,  is  so  important  and  has  given  rise  to  so 
much  controversy  that  we  shall  devote  a  separate  section  to 
its  consideration. 


110  PRINCIPLES   OF   POLITICAL   ECONOMY 

VII.    Whether  Machinery  is  detrimental  to  the  Working 

Classes 

The  classical  economists  who  sought  to  prove  that  in  our 
economic  organization  there  could  be  no  conflict  between  the 
interests  of  society  and  those  of  the  individual,  endeavored  to 
show  that  machinery  does  more  good  than  harm  to  the  working 
classes.  The  three  classical  arguments  are  the  following  :  — 

(1)  Machinery  lowers  prices.  Every  mechanical  inven- 
tion lowers  the  cost  of  producing  an  article,  and  consequently 
lowers  its  value.  By  the  subsequent  fall  in  prices,  the  work- 
man gains  an  advantage  as  consumer  that  is  equivalent  to 
his  loss  as  producer. 

To  this  argument  we  must  reply  that  the  compensation  in 
reduced  prices  will  not  exist  if  the  product  in  question  is 
not  one  consumed  by  the  worker ;  and  this  is  certainly  possi- 
ble. The  manufacture  of  certain  lace  fabrics  by  means  of 
machinery  will  lower  the  price  of  these  goods  ;  but  as  the 
poor  woman  who  made  them  originally  by  hand  is  not  accus- 
tomed to  wearing  that  kind  of  goods,  the  fall  in  price  is  no 
compensation  to  her. 

Even  admitting  that  the  product  in  question  is  ordinarily 
consumed  by  the  worker,  it  may,  nevertheless,  form  so  small 
a  part  of  his  expenditures  that  the  fall  in  prices  is  only  an 
insignificant  saving.  The  woman  who  knits  stockings  and 
who  loses  her  employment  because  of  the  invention  of  knit- 
ting machines,  will  not  readily  find  much  consolation  in  the 
prospect  of  being  able  hereafter  to  buy  her  stockings  cheaper 
at  the  hosier's. 

In  order  that  the  compensation  supposed  to  exist  be  a  real 
one,  mechanical  progress  would  have  to  take  place  simulta- 
neously in  all  branches  of  production,  so  that  the  consequent 
fall  in  prices  would  be  general  and  simultaneous.  In  this 
case  it  might  correctly  be  said  that  it  matters  little  to  the 
workman  that  he  receives  only  half  his  former  wages,  since 
all  his  expenses  are  also  reduced  by  half.  But  we  have 


MACHINERY   AND   THE   LABORER  111 

already  pointed  out  that  mechanical  inventions  are  not 
applied  to  an  equal  extent  in  all  branches  of  production,  but 
only  in  a  small  number  of  them,  and  that  they  affect  but 
slightly  the  cost  of  the  important  necessities  of  a  workman, 
viz.,  food  and  housing. 

(2)  The  increase  of  production.  The  optimists  claim  that 
every  mechanical  invention  causes  a  fall  in  the  price  of  goods ; 
lower  prices  must  involve  larger  sales  and  increased  produc- 
tion, and  the  final  result  is  always  to  give  new  employment  to 
the  workmen  that  have  been  temporarily  displaced.  Instead 
of  taking  work  from  them,  inventions  make  work  for  them. 
Many  examples  of  this  may  be  mentioned,  among  them 
the  invention  of  printing  ;  owing  to  the  increase  of  books 
since  the  invention  of  printing,  how  many  more  printers 
there  are  now  than  there  were  copyists  in  the  Middle  Ages  ! l 

To  this  we  may  answer,  first  of  all,  that  although  an 
increased  sale  is  frequently  a  consequence  of  lowering  prices, 
this  is  by  no  means  always  the  case.  It  is  notably  not  the 
case  under  the  following  circumstances:  (a)  Whenever  a 
commodity  is  used  to  satisfy  a  want  that  is  limited.  The  ex- 
ample of  coffins  has  become  classical.  No  matter  how  cheap 
coffins  have  become,  most  of  us  have  no  use  for  more  than 
one.  There  are  many  other  products,  such  as  wheat  and 
salt,  the  consumption  of  which  would  scarcely  be  increased 
by  a  fall  in  prices.  There  are,  moreover,  articles  of  luxury 
which  would  be  less  in  demand  if  their  prices  should  fall 
considerably.  (6)  Whenever  one  industry  is  bound  up 
with  another  a  fall  in  prices  has  little  effect  on  the  amount 
sold.  This  is  a  very  frequent  case.  The  production  of  wine 
bottles  and  casks  is  limited  by  that  of  wine,  and  no  matter 
how  low  the  price  of  bottles  and  casks  may  fall,  no  more  of 
them  will  be  sold  if  there  is  no  more  wine  to  put  in  them. 

1  In  England  the  number  of  workers  employed  in  manufacturing  cotton 
textiles  in  1835  was  220,000.  To-day  there  are  more  than  600,000.  Yet 
it  is  in  this  very  line  of  work  that  machine-industry  has  made  the  most 
progress. 


112  PRINCIPLES   OF   POLITICAL   ECONOMY 

Similarly,  the  production  of  watch-springs  is  limited  by  that 
of  watches  ;  the  production  of  rivets  by  that  of  boilers,  etc. ; 
and  that  of  boilers  by  other  causes  than  the  price,  —  such  as 
the  development  of  metallurgy,  transportation,  and  mining. 

Moreover,  even  admitting  an  increase  in  consumption  pro- 
portionate or  more  than  proportionate  to  the  fall  in  prices,  it 
will  require  a  long  time  —  perhaps  generations  —  before  this 
increase  is  effected.  It  takes  time  for  the  old  prices  to  fall, 
especially  since  the  dealers  and  manufacturers  are  not  eager 
to  make  the  change,  and  the  public  is  accustomed  to  the 
old  prices.  Competition  among  producers  finally  will  cause 
them  to  fall,  but  rival  industrial  establishments  are  not 
built  in  a  day.  Still  more  time  is  necessary  for  the  fall  in 
prices  to  extend  the  market  to  those  lower  strata  of  society 
that  do  not  change  their  habits  or  their  wants  in  a  short 
time.  While  all  this  is  slowly  being  accomplished,  what 
shall  the  workman  do  who  has  lost  his  employment  ?  Per- 
haps his  grandchildren  will  profit  by  the  change  of  condi- 
tions ;  but  for  him  there  is  little  consolation. 

(3)  Economy  of  labor.  The  use  of  machinery  that  econo- 
mizes manual  labor  necessarily  involves,  it  is  maintained,  a 
gain  for  some  one.  This  gain  is  realized  either  by  the  pro- 
ducer in  the  form  of  increased  profits  if  he  continues  to  sell 
his  goods  at  the  old  price,  or  by  the  consumer,  in  the  form  of 
reduced  expenses  if,  as  is  probably  the  case,  the  price  of  the 
article  falls  to  the  level  of  the  new  cost  of  production.  The 
money  that  was  previously  paid  to  the  workmen  that  are  now 
without  work  is  not  lost ;  it  is  either  in  the  pocket  of  the  em- 
ployer or  in  the  pockets  of  the  consumers.  If  this  is  the  case, 
what  will  be  done  with  it  ?  It  will  be  invested  or  spent ; 
there  is  no  other  alternative.  In  either  case  the  money  will 
encourage  industry ;  it  will  develop  production  either  by 
increasing  the  consumption  of  old  products  and  inaugurat- 
ing that  of  new  products,  or  by  providing  new  capital  for 
productive  enterprises. 

Ultimately,  then,  the  optimists  contend,  every  mechanical 


MACHINERY   AND   THE   LABORER  113 

invention  "  sets  free  "  not  only  a  certain  amount  of  labor,  but 
also  a  certain  Quantity  of  capital ;  and  as  these  two  elements 
have  a  great  affinity  and  cannot  do  without  each  other,  they 
will  end  by  combining. 

This  is  the  argument  that  Bastiat  advances.  It  is  valid 
from  an  abstract  of  view,  but  we  must  ask:  Where  and 
when  will  this  combination  of  labor  and  capital  be  effected  ? 
Perhaps  in  ten  years ;  perhaps  at  the  other  end  of  the  world. 
Possibly  the  consumer  will  use  his  savings  to  help  dig  a 
canal  at  Panama  or  build  a  railroad  in  China.  Capital,  when 
once  set  free,  can  easily  find  investment ;  it  is  nowadays 
readily  transportable  and  can  be  applied  almost  anywhere. 
Unfortunately  the  workman  cannot  so  easily  be  moved.  He 
is  not  fit  for  every  kind  of  work,  nor  can  he  go  to  distant 
parts  of  the  earth  in  quest  of  employment.  In  the  long  run 
he  will  of  course  change  his  place  of  work  or  his  occupation, 
but  the  process  may  be  a  long  and  unpleasant  one.  And  if 
the  change  becomes  necessary  with  every  new  invention  of 
machinery,  workmen  will  be  constantly  out  of  employment. 
The  natural  effect  of  a  permanent  army  of  unemployed 
workers,  often  numbering  from  ten  to  twenty  per  cent  of  the 
laboring  population,  weighs  on  the  market  and  lowers  the 
wages  of  labor.1 

In  a  word,  all  economic  progress,  whether  it  consists  of 

1  The  data  regarding  the  number  of  unemployed  laborers  in  this  country 
are  generally  unsatisfactory.  In  1890,  at  the  Federal  census,  it  was  shown 
that  out  of  the  total  number  of  persons  ten  years  of  age  and  over  engaged  in 
gainful  occupations,  the  number  unemployed  during  Dhe  entire  census  year 
was  1,139,672,  or  5.01  per  cent  of  the  total  number  engaged  in  gainful 
occupations. 

There  is  an  article  in  the  Quarterly  Journal  of  Economics,  Vol.  VIII, 
taking  a  less  favorable  view  of  the  situation.  According  to  this  article,  the 
number  of  unemployed  in  38  cities  in  1893  is  estimated  at  523,080  ;  upon  this 
basis  the  number  in  the  whole  country  would  doubtless  reach  1,600,000. 

Regarding  the  share  of  labor  since  the  introduction  of  machinery,  there 
are  some  significant  statements  made  in  the  latest  United  States  Census.  In 
Vol.  VII,  pp.  cxxiii-iv,  it  is  declared  that  machinery  lowers  the  total  wages 
of  the  group  of  laborers  in  many  industries,  and  also  reduces  the  average  rate 
of  wages. 


114  PRINCIPLES    OF   POLITICAL   ECONOMY 

mechanical  inventions,  or  methods  of  organizing  labor,  or  sys- 
tems of  exchange,  can  have  no  other  effect  than  to  render 
a  certain  amount  of  labor  useless.  As  the  organization  of 
modern  societies  is  founded  on  division  of  labor,  which  re- 
quires that  each  man  perform  a  particular  kind  of  work,  this 
progress  —  whatever  may  be  its  nature  —  must  make  some 
one's  labor  useless,  and  thus  rob  him  of  his  livelihood.  Here 
lies  the  great  difficulty. 

Must  we,  therefore,  —  as  Ruskin  and  his  disciples  maintain, 
—  preach  to  men  the  abandonment  of  steam-engines  and  ma- 
chinery, and  return  to  manual  labor  and  more  humane  natural 
forces,  like  those  of  wind  and  water  ?  It  is  doubtful  whether 
such  advice  would  be  followed.  There  are,  nevertheless,  rea- 
sons for  believing  that  the  great  economic  and  mechanical 
transformation  witnessed  by  the  nineteenth  century  is  draw- 
ing to  a  close,  and  that  our  grandchildren  will  not  be  troubled 
by  the  same  social  upheavals  as  have  recently  occurred  ;  it  is 
probable  that  they  will  be  able  to  live  a  calmer  life  than  we, 
a  life  more  like  that  of  our  grandfathers. 

Indeed,  history  demonstrates  that  in  the  economic  evolution 
of  humanity,  periods  of  rapid  change  have  been  followed 
by  long  periods  of  a  more  or  less  stationary  nature.  It  is 
therefore  probable  that  the  great  economic  revolution  of  the 
present  will  be  succeeded  by  a  long  period  of  rest,  or  at 
any  rate  of  very  gradual  progress,  like  that  of  the  thousand 
years  that  preceded  it.  The  invention  of  the  steam-engine 
has  already  produced  most  of  the  consequences  that  can  be 
expected  of  it.  Does  any  one  object  that  new  social  trans- 
formations will  be  caused  by  new  inventions?  If  so,  how  do 
we  know  ?  And  even  if  such  a  prediction  were  realized,  it 
is  not  probable  that  the  substitution  of  some  undiscovered 
device  for  the  steam-engine  would  produce  a  revolution 
comparable  to  that  caused  by  the  substitution  of  steam- 
engines  for  manual  labor.  -  Within  half  a  century  the  whole 
world  will  be  girded  and  interlaced  by  a  network  of 
electric  telegraphs  and  railroads.  This  is  a  transformation 


MACHINERY   AND   THE   LABORER  115 

that   is   nearly   accomplished   now,    and   that   need    not   be 
repeated. 

Let  us  assume  that  balloons  will  be  made  capable  of  direc- 
tion. Is  the  transportation  of  goods  and  travellers  by 
balloon  likely  to  have  the  same  economic  consequences  as 
replacing  wagons  by  railroads  ?  Finally,  in  a  few  years 
hence,  the  human  race  will  be  settled  on  all  the  space  that  is 
available  on  the  surface  of  the  earth ;  there  will  be  no  more 
vacant  lands,  and  the  economic  perturbation  caused  by  the 
competition  of  new  countries  in  the  markets  of  the  Old  World 
also  will  be  terminated.  The  present  social  transformation, 
therefore,  probably  will  soon  be  completed,  and  doubtless 
will  be  succeeded  by  a  period  of  more  gradual  change.1 

1  John  Stuart  Mill,  in  a  remarkable  chapter  of  his  "  Political  Economy  " 
(Book  IV,  Chapter  6),  refers  to  "  the  impossibility  of  ultimately  avoiding  the 
stationary  state  —  this  irresistible  necessity  that  the  stream  of  human  industry 
should  finally  spread  itself  out  into  an  apparently  stagnant  sea."  He  de- 
clares himself  inclined  to  believe  that  the  stationary  state  of  capital  and 
wealth  "  would  be,  on  the  whole,  a  very  considerable  improvement  on  our 
present  condition." 


CHAPTER  III  — CAPITAL 
I.    The  Two  Concepts  of  Capital 

No  economic  concept  save  that  of  value  has  given  rise  to  so 
many  theories  as  that  of  capital.  All  the  theories  of  capital, 
however,  may  be  brought  under  two  heads,  representing  two 
great  opposite  tendencies.  The  first  is  that  of  the  classical 
economists ;  the  second  that  of  the  socialists.  The  former 
we  shall  outline  first. 

(A)  Numerous  authors  have  invented  stories  of  the  Robin- 
son Crusoe  type,  with  a  view  to  showing  us  how  man  origi- 
nally grappled  unaided  with  the  difficulties  of  existence.  But 
not  one  of  these  authors  has  failed  to  provide  his  hero  with  a 
few  tools  or  provisions,  usually  saved  from  a  shipwreck. 
These  writers  knew  perfectly  well  that  unless  they  did  this 
the  story  would  have  had  to  stop  at  the  second  page,  for  the 
life  of  their  hero  could  not  have  lasted  longer.  Yet  what 
would  Robinson  need  ?  Had  he  not  the  ability  to  work,  and 
all  the  resources  of  the  fruitful  virgin  soil  upon  which  novel- 
ists wisely  stranded  him  ?  Yes ;  but  there  was  still  some- 
thing lacking,  and  as  the  romantic  hero  could  not  do  with- 
out it,  writers  were  obliged  to  devise  some  scheme  by  which 
he  might  obtain  it.  This  requisite  thing  was  capital. 

But  it  is  unnecessary  to  imagine  the  romantic  situation  of  a 
Robinson  Crusoe  in  order  to  be  convinced  of  the  utility  of 
capital.  The  same  state  of  things  prevails  in  actual  every- 
day society.  There  is  no  problem  more  difficult  to  solve  than 
how  to  acquire  something  when  one  possesses  nothing.  Take 
a  common  laborer,  a  man  without  means.  How  can  he  earn 
his  bread  ?  He  cannot  engage  in  any  productive  enterprise, 
not  even  that  of  a  poacher,  for  a  poacher  needs  a  gun.  He 

116 


CAPITAL  117 

cannot  even  become  a  burglar,  without  implements.  He 
might  render  slight  services,  such  as  running  errands  or 
opening  the  doors  of  carriages  in  front  of  the  theatres  ;  but 
this  is  more  like  begging  than  like  productive  work.  He 
would  be  as  wretched,  as  helpless,  and  as  sure  to  die  of  star- 
vation, as  a  Crusoe  who  had  saved  nothing  from  the  wreck, 
were  it  not  for  the  wage-system  that  enables  him  to  enter 
the  service  of  some  one  provided  with  capital  who  is  willing 
under  certain  conditions  to  furnish  him  with  the  food  and 
the  tools  that  are  requisite  for  production. 
^Animals  doubtless  depend  on  their  "  labor  "  and  on  nature 
to  obtain  food  and  to  satisfy  their  other  wants.  Primitive 
man  was  necessarily  in  the  same  situation.  The  very  first 
capital  that  man  possessed  must  have  been  made  without  the 
aid  of  other  capital.  At  some  time  or  other,  man,  worse  off 
than  Robinson  on  his  island,  must  have  solved  the  difficult 
problem  of  producing  the  first  wealth  without  the  help  of  any 
preexisting  wealth.  He  was  originally  reduced  to  the  need 
of  starting  the  whole  onward  movement  of  human  industry 
by  the  aid  of  his  hands  alone.  Once  started,  however,  the 
most  difficult  step  was  taken,  and  human  industry  has  ever 
since  then  progressed  with  increasing  rapidity.  The  first 
pointed  stone  that  was  picked  up,  the  flintstone  of  the  an- 
thropopithecus,  served  to  help  make  other  new  implements 
under  conditions  more  favorable  to  production  ;  and  these  in 
turn  helped  to  prepare  the  way  for  still  more  discoveries. 
The  ease  of  production  increases  like  a  geometrical  progres- 
sion, and  is  proportionate  to  the  amount  of  wealth  already 
produced.  It  is  well  known  that  although,  after  a  certain 
point,  a  geometric  progression  increases  very  rapidly,  the 
increase  is  very  slow  at  the  beginning.  Similarly,  our  mod- 
ern societies,  living  on  the  wealth  stored  up  by  a  thousand 
generations,  find  it  easy  to  increase  all  kinds  of  wealth  ;  yet 
they  should  not  forget  how  slow  and  perilous  at  the  outset 
this  process  of  accumulation  must  have  been.  How  many 
centuries  must  have  been  required  for  man  to  traverse  the 


118  PRINCIPLES   OF   POLITICAL   ECONOMY 

epochs  of  hewn  stone  and  of  polished  stone,  and  to  lay  up  the 
first  supply  of  capital !  There  is  no  doubt  that  millions  must 
have  perished  of  misery  during  this  critical  period.  Only  a 
few  races  have  been  able  to  traverse  it  and  rise  to  the  rank 
of  truly  capitalistic  societies.  Ad  augusta  per  angusta. 

(B)  The  second  explanation  of  capital,  given  by  the 
socialists,  especially  by  Karl  Marx  and  Ferdinand  Lassalle, 
may  be  summarized  as  follows  :  — 

The  definition  and  origin  of  capital  are  entirely  different 
from  the  classical  explanation.  Capital  is  not  simply  any  in- 
strument of  production,  but  all  wealth  which  serves  to  provide 
its  possessor  with  an  income  independent  of  his  labor.  We 
must  acknowledge  that  this  definition  harmonizes  better  with 
the  general  idea  of  capital,  i.e.  that  which  furnishes  an  income. 
But  it  evidently  presupposes  a  specific  economic  and  social 
organization,  especially  the  fact  that  wealth  may  be  loaned 
at  interest  or  may  be  employed  to  give  work  to  people  who 
are  glad  to  hire  themselves  out  for  wages.  Now  this  par- 
ticular social  organization  does  not  exist  everywhere  ;  it  is 
of  quite  recent  origin,  and  in  Europe  dates  from  the  six- 
teenth century.  A  proof  of  this  lies  in  the  fact  that  the  very 
word  "  capital "  was  not  used  previously.  The  ruin  of  small 
industry  and  .small  farming,  the  expropriation  of  the  masses, 
and  the  creation  of  a  permanent  class  of  wage-workers,  —  all 
these  things  had  to  be  accomplished  before  capital  acquired 
the  power  to  command  the  labor  of  others  and  ,to  provide 
its  owner  with  an  income  not  due  to  any  work  of  his  own, 
unless  we  regard  as  work  the  task  of  watching  over  one's 
possessions  and  collecting  profits. 

This  is  why  socialists  find  the  comparison  of  capital  to  the 
bow  and  arrow  of  the  primitive  savage,  or  to  any  tool  in  the 
possession  of  Robinson  Crusoe,  simply  ridiculous.  Neither 
the  savage  nor  Robinson  could  have  obtained  an  income  with 
these  implements.  Hence  they  were  not  capital,  according 
to  the  socialists,  who  ridicule  what  might  be  called  the 
naturalistic  concept  of  capital,  and  substitute  for  it  the  his- 


CAPITAL  119 

torical  concept,  which  regards  capital  not  as  a  permanent  or 
necessary  institution  but  as  the  result  of  history.  They  re- 
gard capital  as  a  "  historical  category  "  —  as  Rodbertus  would 
say  —  which  made  its  appearance  at  a  definite  period  of  his- 
tory, and  whi&h  will  disappear  in  due  time. 

The  violent  opposition  between  these  two  theories  is 
largely  due  to  the  fact  that  efforts  have  been  made  to  use 
them  as  weapons  of  social  warfare,  the  first  being  employed 
to  justify  the  role  of  capital  and  the  second  to  discredit  it. 
The  first  school  exclaims  :  How  useful  capital  is,  since  even 
Robinson  Crusoe  could  not  have  lived  without  it  !  And  the 
second  replies  :  What  a  tyrant  capital  is,  since  it  lives  only 
on  the  labor  of  others  !  Such  arguments  as  these  are  ethical 
in  nature,  and  need  not  be  considered  until  we  reach  Book 
III,  on  the  Distribution  of  Wealth.  The  only  point  which 
concerns  us  now  is  the  true  function  of  capital  in  the  pro- 
duction of  wealth. 

Now  there  is  no  necessary  contradiction  between  these 
two  theories,  since  the  one  regards  capital  in  its  natural, 
permanent,  sociological  characteristics,  while  the  other  con- 
siders its  acquired,  relative,  historical  nature.  Both  may  be 
true,  and,  in  fact,  each  of  them  contains  part  of  the  truth. 

It  is  certain  that  the  part  played  by  capital  has  been 
modified  by  economic  evolution.  First  it  was  the  simple 
tool  of  the  manual  laborer  ;  later  it  gradually  passed  out  of 
his  possession  and  came  into  that  of  the  wealthy  members 
of  society.  Whereas  it  was  at  first  simply  an  instrument  of 
production,  it  is  now  often  made  an  instrument  of  money- 
making  and  the  means  of  obtaining  an  income  without  work- 
ing. This  new  state  of  society  is  what  the  socialists  call 
u  capitalism." 1  But  although  it  may  be  admitted  that 

1  It  has  been  said  that  each  of  the  three  factors  of  production  has  in  turn 
exerted  a  preponderant  influence.  In  primitive  societies  of  hunter,  fisher, 
and  shepherd  peoples,  nature  is  the  all-important  factor.  In  Antiquity  and 
the  Middle  Ages  labor  was  the  most  important  factor  ;  in  modern  industrial 
societies  it  is  capital. 


120  PRINCIPLES    OF   POLITICAL   ECONOMY 

"  capitalism "  will  some  day  disappear,  capital  will  still 
remain. 

The  definition  given  by  the  classical  economists  is  there- 
fore better,  precisely  because  it  emphasizes  those  features  of 
capital  that  are  essential  and  necessary,  while  the  other  defi- 
nition points  out  only  its  accidental  and  ephemeral  character- 
istics. 

The  fact  that  no  wealth  can  be  produced  without  the  help 
of  preexisting  wealth  is  an  economic  law  whose  importance 
cannot  be  exaggerated.  Just  as  fire  cannot  be  started  with- 
out the  use  of  some  ignited  substance,  just  as  an  explosive 
mixture  will  not  explode  unless  a  lighted  fuse  or  similar 
contrivance  be  brought  near  it,  just  as  a  living  being  can- 
not be  produced  without  the  presence  of  some  preexisting 
living  substance  (germ,  cell,  or  protoplasm),  similarly  wealth 
cannot  be  produced,  under  ordinary  economic  conditions, 
without  the  help  of  a  certain  amount  of  preexisting  wealth 
which  plays  the  same  part  as  the  fuse  does  in  starting  explo- 
sions. Now  it  is  necessary  to  give  a  name  to  this  preexist- 
ing wealth,  the  function  of  which  is  so  important  and  so 
well-defined.  We  shall  call  it  "capital."  If  socialists  dis- 
like the  name,  they  have  the  right  to  propose  another  ;  but  as 
they  have  not  done  so,  we  may  for  the  present  retain  this  one. 

II.    The  Distinction   between   Wealth   which  is  Capital   and 
Wealth  which  is  not  Capital 

All  wealth  must  be  applied  in  one  of  two  ways :  either  to 
serve  for  consumption,  or  to  serve  for  production. 

Wealth  serves  for  consumption  when  it  is  used  directly  to 
satisfy  some  of  our  wants,  —  to  afford  us  some  gratification. 
It  is  unnecessary  to  enumerate  the  wants  and  enjoyments  for 
which  wealth  is  used,  as  an  enumeration  would  have  to  in- 
clude all  that  is  placed  on  our  table,  or  used  in  our  house,  or 
that  contributes  in  any  way  to  our  immediate  pleasure.  But 
this  category  of  wealth  is  not  the  largest ;  there  are  other 


CAPITAL  121 

kinds  of  wealth,  incapable  of  being  used  directly  to  provide 
gratification.  Such  wealth  is  employed  in  the  production  of 
consumable  wealth,  that  is,  wealth  of  the  first-named  kind. 
This  intermediate,  non-consumable  wealth  consists  partly 
of  instruments  and  goods  altogether  unfit  for  consumption, 
partly  of  raw  material  which  can  be  consumed  (i.e.  made 
to  provide  gratification)  only  after  having  undergone  certain 
transformations.  This  kind  of  wealth  fills  our  factories, 
farms,  storehouses,  and  docks.  To  this  whole  second  group, 
consisting  of  wealth  not  fit  or  not  intended  for  consumption, 
we  apply  the  name  capital. 

But  the  above  classification,  however  simple  it  may  appear 
at  first  sight,  requires  some  explanation. 

Above  all,  we  must  not  believe  that  it  is  possible  to  clas- 
sify all  commodities  under  one  or  the  other  of  these  divisions, 
by  reason  of  specific  qualities  inherent  in  each  commodity. 
Any  object  having  value  may  become  capital,  provided  cer- 
tain conditions  are  fulfilled.  The  idea  of  capital  does  not 
connote  a  certain  class  or  kind  of  goods,  but  a  certain  condi- 
tion or  purpose  of  goods.  All  wealth  may  at  some  time  or 
other  become  capital,  just  as  every  physical  element  may,  at 
a  certain  degree  of  temperature,  become  a  gas.  The  feature, 
condition,  or  purpose  that  makes  wealth  capital  is  its  produc- 
tive use  in  conjunction  with  labor.  A  diamond  in  the  hands  of 
a  jeweller  or  a  glazier,  flowers  in  the  possession  of  a  florist,  a 
clown's  costume  owned  by  a  theatrical  director,  all  become 
capital,  because  they  are  instruments  of  production.  Perhaps 
it  may  be  objected  that  they  do  not  produce  any  new  wealth, 
and  are  therefore  not  useful  to  society.  To  this  we  must  re- 
ply that  they  are  no  more  and  no  less  useful  than  the  occu- 
pations in  which  they  serve  as  accessories  or  as  raw  material. 
It  may  be  urged,  from  a  moral  and  social  point  of  view, 
that  the  work  of  jewellers,  florists,  and  actors  is  useless  ;  in 
which  case  we  must  refer  to  the  discussion  regarding  the  dis- 
tinction between  productive  and  unproductive  labor.  These 
services  (of  actors,  etc.)  satisfy  a  desire  and  have  a  value; 


122  PRINCIPLES    OF   POLITICAL   ECONOMY 

hence  they  are  productive  in  the  economic  sense  of  the  term, 
and,  consequently,  the  implements  employed  in  these  occupa- 
tions are  also  productive  in  the  same  sense.1 

Nor  is  this  all.  It  should  also  be  noted  that  some  kinds 
of  wealth,  even  when  used  not  productively  but  for  con- 
sumption, may,  nevertheless,  bring  an  income  to  their  owner 
by  means  of  hire  or  rent ;  for  example,  a  rented  villa,  hired 
furniture,  or  money  loaned  to  a  spendthrift,  or  even  to  a 
government  (which  generally  offers  a  still  more  striking 
instance  of  unproductive  consumption).  Must  not  wealth, 
in  this  case,  also  be  called  capital  ?  We  do  not  hesitate  to 
call  it  capital  in  everyday  language,  arid  we  are  justified  in 
doing  so,  provided  we  are  careful  to  indicate  the  difference 
between  this  kind  of  capital  and  the  preceding  kind  by 
means  of  some  qualification  which  enables  us  to  keep  them 
apart.  As  a  matter  of  fact,  these  kinds  of  capital  are  very 
dissimilar.  As  the  last-mentioned  capital  is  not  in  the  service 
of  labor,  it  produces  nothing  of  itself,  —  neither  new  wealth 
nor  new  value.  Hence  we  naturally  ask  :  Whence  comes 
the  income  which  this  capital  provides  for  its  owner  ?  It 
comes  from  the  pockets  of  the  borrower  or  the  tenant,  who 
is  obliged  to  procure  it  by  his  own  labor  or  by  employing 
some  other  capital  productively.  Such  capital  as  this  we 
shall  call  lucrative  capital?' 

To  sum  up,  then,  there  are  three  kinds  of  wealth  :  — 

(1)    That  which  serves  only  for  consumption  and  which 

1  Besides,  if  it  were  necessary  to  introduce  such  non-economic  considera- 
tions as  morality  or  social  usefulness  in  the  narrower  sense,  it  is  evident  that 
machines  which  serve  in  the  production  of  cannon  or  armor  for  cruisers  must 
be  declared  absolutely  unproductive,  and  it  would  also  be  necessary  to 
remove  three-fourths  of  our  metallurgical  plants  from  the  list  of  capital. 

2  Boehm-Bawerk,  in  his  remarkable   book  on   "  Capital  and  Interest," 
approves  this  classification  and  terminology ;   but  he  also  calls  productive 
capital  "social  capital,"   and  lucrative  capital  "individual  capital."     He 
means  that  only  the  former  kind  is  capital  for  society,  the  latter  being  capital 
solely  for  the  individual.     But  this  terminology  is  likely  to  cause  error, 
because  lucrative  capital  cannot  be  conceived  as  existing  save  in  society, 
while  productive  capital  might  exist  even  for  a  Robinson  Crusoe. 


CAPITAL  123 

is    not    capital,    although    it    may    at    any    time    become 
capital.1 

(2)  That  which,  like  the  preceding,  serves  only  for  con- 
sumption, but  which,  nevertheless,  gives  its  owner  an  income 

1  In  making  an  inventory  of  the  riches  of  a  country,  this  wealth  is  counted 
as  virtual  capital.  Some  categories  of  wealth  have  given  rise  to  many 
controversies. 

In  ordinary  language  we  designate  as  "  capital "  (as  opposed  to  immovable 
property)  all  movable  or  personal  values  represented  by  shares  of  stock, 
bonds,  etc.  But  these  values  are  only  representative  capital;  i.e.  they 
represent  real  capital  invested  in  mines,  railroads,  industrial  plants,  etc. 
We  must,  therefore,  take  care  not  to  count  them  twice  in  the  inventory  of  a 
nation's  wealth,  —  once  as  valuable  documents,  and  again  as  the  really 
existent  wealth  which  they  represent.  Often  they  are  really  only  lucrative 
capital,  in  the  sense  which  we  have  given  to  this  term  ;  that  is  to  say,  they 
do  not  correspond  to  any  real  capital  at  all ;  such,  for  instance,  are  govern- 
ment bonds. 

On  the  other  hand,  in  ordinary  language  the  name  "capital"  is  never 
given  to  immovable  property,  like  land  and  buildings.  As  for  land,  it  should 
certainly  not  be  called  capital  when  we  mean  unused  land  as  provided  by 
nature,  for  this  would  be  to  confound  nature  and  capital ;  but  whenever  land 
is  modified  by  cultivation,  we  may  well  ask  whether  it  does  not  then  fall 
under  the  head  of  productive  capital,  since  it  is  then  a  product  of  nature  and 
labor  and  undoubtedly  serves  to  produce  new  wealth. 

Buildings  are,  on  the  contrary,  essentially  only  objects  of  consumption, 
since,  like  food  and  clothes,  they  are  products  in  their  final  form,  having  no 
other  purpose  than  to  satisfy  human  wants.  But  they  may  become  lucrative 
capital  for  their  owners  if  they  do  not  occupy,  but  rent  them  ;  they  may 
even  become  productive  capital  if  they  are  not  used  for  habitation  but  for 
production,  i.e.  as  workshops,  stores,  etc. 

It  must  be  admitted  that  the  above  statement  has  been  vigorously  denied. 
Many  economists  contend  that  a  house,  even  when  used  for  residence,  is 
always  capital,  because  it  always  produces  an  income  in  the  shape  of  shelter, 
comfort,  and  the  advantages  it  gives.  But,  from  this  point  of  view,  the  arm- 
chair in  which  I  sit,  the  glass  of  wine  which  I  drink,  should  also  be  called 
capital  productive  of  income,  because  they  render  me  a  service  or  an 
advantage.  Indeed,  some  economists  have  gone  as  far  as  this  (Walras  and 
Irving  Fisher) . 

What  is  to  be  said  of  money,  of  coin  ?  For  a  nation  it  is  always  capital. 
For  an  individual,  it  is  or  is  not  capital,  according  to  the  use  made  of  it. 
There  are,  however,  authors  who  maintain  that,  even  for  individuals,  money 
is  always  capital,  because  it  can  never  be  consumed  directly,  but  only  after 
being  exchanged  for  objects  of  consumption. 


124  PRINCIPLES   OF   POLITICAL  ECONOMY 

derived  from  the  income  of  others.  This  we  call  lucrative 
capital. 

(3)  That  which  is  actually  employed  in  production,  and 
which  we  shall  therefore  call  productive  capital. 

In  this  chapter  on  production  we  really  have  to  do  only 
with  the  last  kind  of  wealth.  The  other  kinds  will  be  dis- 
cussed in  the  sections  on  Distribution. 


III.   What  is  meant  by  the  "Productivity  "  of  Capital? 

The  part  played  by  capital  in  production  has  given  rise  to 
unfortunate  misconceptions.  It  is  customary  to  say  that 
capital  yields  an  income.  This  seems  to  be  an  essential  part 
of  its  nature,  just  as  trees  naturally  bear  fruit  or  as  hens 
naturally  lay  eggs.  Hence  the  income  provided  by  capital 
is  regarded  as  a  product  due  exclusively  to  capital.  The 
spread  of  this  false  notion  is  partly  due  to  the  fact  that  a 
vast  amount  of  capital  is  in  the  form  of  securities,  bonds,  or 
shares,  to  which  coupons  are  attached  representing  the  inter- 
est that  falls  due  every  year  or  every  six  months.  The  coupons 
"  grow  "  in  value  as  time  advances,  and  when  the  day  of  pay- 
ment comes  they  are  detached  and  collected.  Just  as  a  fruit 
or  seed  can  be  sown  again  to  produce  new  fruit  or  seed,  and 
just  as  a  newly  laid  egg  can  be  made  to  produce  another  hen 
for  laying  more  eggs,  so  these  coupons  may  be  used  as  new 
capital  and  invested  in  such  a  way  as  to  provide  new  interest- 
coupons.  Thus  it  may  seem  that  capital  grows  and  in- 
creases according  to  the  same  laws  as  those  that  govern  the 
multiplication  of  plants  and  animals.  But  the  law  of  com- 
pound interest  (this  is  the  name  given  to  the  above-mentioned 
multiplying  process  of  capital)  is  even  more  marvellous  than 
the  multiplication  of  animal  organisms.  It  has  been  calcu- 
lated that  a  single  cent,  invested  at  compound  interest  on  the 
first  day  of  the  Christian  era,  would  by  now  have  yielded  a 
value  equal  to  that  of  some  thousand  million  globes  of  solid 
gold  as  large  as  the  earth. 


'    CAPITAL  125 

We  must  nevertheless  abandon  the  idea  of  the  natural  pro- 
ductivity of  capital, —  an  idea  which  has  aroused  the  more  or 
less  justifiable  ire  of  the  socialists.  This  mysterious  produc- 
tive and  generative  power,  attributed  to  capital  as  part  of  its 
nature,  is  a  pure  chimera.  Notwithstanding  the  popular 
belief  to  the  contrary,  money  does  not  produce  money,  capital 
does  not  produce  capital.  Not  only  has  a  bag  of  money  never 
produced  a  single  cent,  as  Aristotle  remarked  long  ago,  but  a 
bale  of  cotton  or  a  ton  of  iron  never  has  produced  any  cotton 
or  iron.  Capital  is  inert  matter,  and  by  itself  is  absolutely, 
sterile.  But  when  it  is  put  in  the  service  of  labor,  as  we  have 
seen  in  the  preceding  chapter,  it  gives  labor  a  degree  of  pro- 
ductivity that  may  be  very  great.  With  a  horse  and  plough, 
a  farmer  can  produce  much  more  wheat  than  with  his  manual 
labor  alone.  It  is  this  increased  or  supplementary  crop  that 
constitutes  the  income  from  capital.  It  does  not  arise  from 
the  plough  ;  it  is  due  to  the  man  aided  by  the  plough. 

What  leads  us  astray  is  the  fact  that  we  see  many  persons 
living  on  their  income,  and  even  growing  richer,  without 
working.  Hence  it  appears  that  their  income  arises  from 
capital,  and  is  spontaneously  produced  by  it.  In  reality,' this 
income  is  the  product  of  labor,  —  labor  which  we  do  not  see 
but  which  is  not  difficult  to  find,  viz.,  the  labor  of  those  who 
borrowed  the  capital  of  its  owner  and  who  employ  it  produc- 
tively. There  can  be  no  doubt  about  this.  The  coupons  rep- 
resenting the  interest  on  the  bonds  of  a  coal-mining  company 
represent  the  value  of  coal  extracted  by  the  labor  of  miners ; 
the  coupons  of  railway  bonds  represent  the  result  of  the 
labor  of  mechanics,  conductors,  brakemen,  station-masters, 
switchmen,  etc.,  who  perform  the  work  of  transportation.1 

1  It  is  for  this  reason  that  socialists  draw  the  conclusion  that  the  profit 
given  to  the  capitalist  constitutes  a  social  injustice.  This  may  indeed  be  the 
case  ;  but  it  is  not  necessarily  so,  for  we  have  shown  that  without  the  aid  of 
wealth,  labor  is  doomed  to  remain  sterile.  Consequently,  every  laborer  who 
has  not  the  good  fortune  to  possess  wealth  is  obliged  to  borrow  it  in  some 
way  or  other ;  and  it  seems  natural  and  legitimate  that  he  should  pay  for  its 
use. 


126  PRINCIPLES  OF  POLITICAL  ECONOMY 

It  is,  however,  possible  that  the  capital  in  the  hands  of  the 
borrower  has  been  dissipated  or  consumed  unproductively. 
In  this  case  the  interest  received  by  the  lender  does  not 
represent  the  product  of  the  borrower's  labor,  but  the  labor 
of  some  other  person  whose  identity  is  still  to  be  sought,  but 
who  nevertheless  exists  somewhere.  The  coupons  of  govern- 
ment bonds,  for  example,  do  not  represent  wealth  produced 
by  the  labor  or  industry  of  the  state,  since  the  state  produces 
but  little  and  is  even  in  the  habit  of  expending  unproductively 
the  greater  part  of  the  capital  lent  to  it ;  but  these  coupons 
do  represent  the  labor  of  all  the  citizens  who  each  year  pay 
into  the  public  coffers  taxes  which,  in  the  form  of  interest, 
pass  into  the  possession  of  the  creditors  of  the  government. 
So  also,  when  a  young  man  borrows  money  to  spend  foolishly, 
the  interest  which  he  pays  to  the  money-lender  certainly  does 
not  represent  the  product  of  his  own  labor,  but  perhaps  that 
of  the  workmen  in  his  employ,  or  of  the  farmers  on  his  estate.1 
(See  what  we  have  said  regarding  lucrative  capital,  on  page 
122.) 

1  Boehm-Bawerk,  in  his  explanation  of  the  nature  and  function  of  capital, 
points  out  that  the  ultimate  purpose  of  production  is  to  furnish  goods  tor 
consumption,  and  that  this  may  be  done  in  two  ways  :  directly  and  indirectly. 
The  direct  way  is  immediately  to  unite  the  forces  of  nature  with  our  own 
efforts,  and  thus  produce  what  we  want.  The  indirect  or  roundabout  way  is 
first  to  produce  means  of  production,  i.e.  such  tools  or  devices  as  will  ulti- 
mately augment  our  productive  powers.  Take,  for  example,  the  case  of  a 
thirsty  farmer ;  he  may  go  to  the  neighboring  spring  and  drink  out  of  the 
palm  of  his  hand  whenever  he  is  thirsty.  This  method,  however,  is  incon- 
venient ;  he  must  go  several  times  each  day,  and  he  cannot  hold  much 
water  in  the  palm  of  his  hand.  He  may  stop  to  make  a  bucket,  and  thus 
take  away  enough  water  to  satisfy  his  thirst  for  a  whole  day.  But,  in  order 
to  do  this,  he  must  first  get  the  wood  and  devote  several  hours  to  cutting 
it  into  shape.  There  is,  however,  even  a  more  roundabout  but  more  perfect 
process.  The  farmer  may  cut  down  a  number  of  trees  in  the  forest,  make 
wooden  pipes  of  them,  have  them  carry  the  water  to  his  house,  and  in  this 
way  procure  a  constant  stream  of  water  at  his  very  door  or  within  his  house. 
The  last  process  is  of  course  the  longest  and  most  roundabout  method,  but  it 
is  ultimately  the  best ;  it  is  production  by  means  of  capital,  capital  being  the 
name  of  the  intermediary  products  by  means  of  which  we  ultimately  obtain, 
under  more  favorable  conditions,  the  things  we  want. 


CAPITAL  127 


IV.   The  Durability  of  Fixed  and  of  Circulating  Capital 

Capital  may  last  for  a  long  or  a  short  time.  According  to 
its  duration  it  will  serve  for  a  larger  or  smaller  number  of 
productive  acts.  Capital  which  can  be  used  only  once, 
because  it  is  consumed  in  the  act  of  production,  is  called, 
circulating  capital;  examples  of  this  kind  of  capital  are :  the 
wheat 'that  is  sown,  manure  that  is  mixed  with  the  soil,  coal 
that  is  burned,  cotton  that  is  spun.  Capital  that  can  be 
used  to  serve  for  several  productive  acts  is  called  fixed 
capital;  it  may  include  the  most  fragile  implements,  such 
as  needles,  and  the  most  durable  kinds  of  wealth,  such 
as  canals  or  tunnels,  which  last  as  long  as  the  world.1 

Whenever  it  can  be  done,  there  is  great  advantage  in 
employing  capital  of  long  durability.  However  considerable 
may  be  the  labor  required  by  its  production,  and  however 
slight  may  be  the  labor  saved  each  year  by  the  assistance  of 
this  capital,  there  must  necessarily  come  a  time,  sooner  or 
later,  when  the  labor  saved  will  equal  the  labor  originally 
expended.  When  this  point  is  reached,  and  when  —  to  use 
the  customary  expression  —  capital  is  "  redeemed,"  the  labor 
subsequently  economized  will  be  a  net  gain  for  society ;  from 
that  time  onward,  and  for  the  whole  period  of  its  duration, 
the  service  rendered  by  capital  will  be  gratuitous.  The 

1  It  should  be  pointed  out  that  Adam  Smith,  who  first  used  these  terms, 
"  fixed  "  and  "circulating  "  capital,  used  them  in  a  somewhat  different  sense. 
He  understood  by  circulating  capital  that  which  provides  an  income  only  by 
circulating,  i.e.  by  changing  hands,  by  being  exchanged  {e.g.  merchandise 
and  money).  By  fixed  capital  he  means  that  which  returns  an  income  with- 
out being  exchanged,  and  which  stays  in  the  same  hands  (e.g.  a  factory). 
This  definition  seems  scarcely  satisfactory,  since  it  would  lead  us  to  declare 
that  coal  burnt  by  a  manufacturer  in  his  furnaces  is  fixed  capital  (since  it  is 
not  intended  for  sale)  whereas  houses  owned  by  a  building  society  that  buys 
them  to  sell  would  have  to  be  regarded  as  circulating  capital.  In  other  words, 
for  Adam  Smith  the  essence  of  circulating  capital  lay  in  the  change  of  owner- 
ship ;  in  the  definition  we  have  adopted,  it  is  to  be  found  in  the  change  of 
nature. 


128  PRINCIPLES   OF  POLITICAL  ECONOMY 

progress  of  civilization  tends  always  to  replace  capital  of 
less  durability  by  capital  of  greater  durability. 

Three  points,  however,  should  not  be  overlooked :  — 

(1)  The  formation  of  very  durable  capital  generally  requires 
an  amount  of  labor  proportionate  to  the  increased  durability. 
A  certain  equilibrium  must  therefore  be  sought  between  the 
labor-cost  of  the  capital  and  its  durability.     We  may  say  in 
general  that  the  increased  cost  in  labor  usually  is  not  so  great 
as  the  gain  in  durability ;  it  is  this  circumstance  that  makes 
the  use  of  such  capital  profitable. 

(2)  The  formation  of  fixed  capital  demands  the  present  and 
immediate  sacrifice  of   a  large  amount  of   labor  and  other 
commodities,  while  the  remuneration  anticipated  in  econo- 
mized labor  or  economized  expense  is  more  or  less  distant  in 
the  future.     The  return  for  capital,   moreover,  is   all   the 
more  distant  when  it  is  of  great  durability.     Take  a  con- 
crete example.      If  the  construction  of  a  canal,  such  as  the 
Panama  Canal,  is  to  cost  §140,000,000,  and  the  time  for  the 
repayment  of  this  sum  is  fifty  years,  we  must  compare  these 
two  items :  on  the  one  hand  an  immediate  expenditure  of  so 
large  a  sum,  and  on  the  other  hand    a   remuneration   for 
which  we  must  wait  half  a  century.     Now  to  make  any  such 
comparison  as  this,  considerable  foresight  and  not  a   little 
boldness  are  necessary.     It  requires,  moreover,  firm  faith  in 
the  future.     These  are  qualities  that  are  found  only  in  highly 
civilized  communities.     Peoples  whose   social   state   is   not 
advanced  and  whose  political  organization  affords,  but  little 
security,  rarely  employ  large  amounts  of  fixed  capital ;  all 
their  wealth  takes  the  form  of  articles  for  consumption,  or  of 
circulating  capital. 

Even  under  the  most  favorable  circumstances,  the  faculty 
of  foresight  is  limited.  An  individual,  a  company,  or  even 
a  government,  w*ould  not  consent  to  advance  capital  which 
will  not  be  paid  back  for  two  centuries,  although  it  may  be 
certain  that  this  capital  could  last  for  a  thousand  years  and  con- 
sequently render  gratuitous  services  for  eight  hundred  years. 


CAPITAL  129 

Why  ?  Because  results  that  are  not  entirely  attained  for  so 
long  a  period  as  this,  do  not  fall  within  the  scope  of  human 
predictions.  As  a  general  statement  of  fact  we  may  lay  down 
the  rule  that  capital  which  is  not  repaid  in  the  course  of  a 
generation  is  regarded  as  poorly  invested. 

(3)  It  must  finally  be  pointed  out  to  the  disadvantage  of 
fixed  capital  that,  if  its  durability  is  too  great,  it  runs  the  risk 
of  becoming  useless.  Therefore  great  prudence  should  be 
exercised  in  our  estimate  of  future  results.  The  mere  mate- 
rial durability  of  capital  is  not  nearly  so  important  as  the 
period  of  its  utility.  We  can  generally  tell  how  long  a  tun- 
nel will  last,  but  we  do  not  know  how  long  traffic  may  be 
expected  to  continue  taking  the  route  that  leads  through  the 
tunnel.  Utility  is  very  unstable ;  what  at  one  time  is  re- 
garded as  the  most  useful  of  goods  or  institutions  may  at  a 
subsequent  time  no  longer  be  so  regarded.  Suppose  we  have 
built  a  canal,  and  before  the  capital  sunk  in  it  has  been  re- 
deemed, traffic  may  have  taken  another  route ;  in  this  case 
a  certain  quantity  of  labor  will  have  been  uselessly  expended. 
Aware,  then,  of  our  ignorance  of  the  future,  it  is  prudent  not 
to  build  for  all  eternity.  The  creation  of  too  durable  capital 
must  be  regarded  as  ill-advised. 

V.    How  Capital  is  Formed 

Capital,  being  always  a  product,  or,  as  Boehm-Bawerk  says, 
an  "  intermediary  product,"  can  only  arise,  like  every  other 
product,  from  the  two  original  factors  of  all  production  : 
labor  and  nature.  All  the  kinds  of  capital  that  we  can  think 
of  —  tools,  machinery,  works  of  art,  and  materials  of  all 
classes  —  can  have  no  other  origin  but  this.1 

There  would  be  no  need  to  stop  and  discuss  so  clear  a  mat- 
ter as  the  formation  of  capital,  if  the  attempt  had  not  been 

1  Karl  Marx  called  capital  "crystallized  labor."  His  phrase  would  be 
accurate  had  he  not,  in  adhering  to  his  principle  that  all  value  springs  from 
labor,  purposely  omitted  the  part  played  by  nature  in  the  formation'  of 
capital. 


130  PKINCIPLES    OF   POLITICAL   ECONOMY 

made  to  base  the  formation  of  capital  on  a  new  agent,  of  a 
special  nature,  called  saving.  It  is  a  popular  bit  of  wisdom 
that  we  can  grow  rich  only  by  means  of  labor  and  saving. 
We  already  know  what  labor  is.  But  what  is  saving,  this 
new  element  that  is  now  introduced?  Is  it  a  third  original 
factor  of  production,  that  we  have  neglected  to  mention  ? 
Certainly  not,  as  labor  and  the  forces  of  nature  are  the  only 
conceivable  creators  of  wealth.1  Is  it,  then,  a  form  of  labor  ? 
Some  have  maintained  that  it  is.  But  what  is  there  in  com- 
mon between  labor  and  saving?  To  labor  is  to  act;  to  save 
is  to  abstain.2  It  is  hard  to  conceive  how  a  purely  negative 
act,  simple  abstention  from  using,  could  produce  anything. 
And  when  Montaigne  declares  that  he  knows  "no  action  so 
potent  and  effective  as  this  inaction,"  this  may  be  true  from 
the  moral  point  of  view,  but  it  does  not  explain  how  inaction 
can  create  even  the  least  valuable  commodity.  When  wealth 
is  said  to  have  been  created  by  saving,  do  we  mean  that  if 
this  wealth  had  been  consumed  as  soon  as  it  was  produced,  it 
would  not  now  be  in  existence  ?  If  so,  it  is  a  self-evident 
fact  familiar  to  everybody.  If  a  child  asks  where  chickens 
come  from,  and  we  answer  that  in  order  to  produce  chickens 
we  must  refrain  from  eating  eggs,  this  reply  may  be  excellent 
advice,  but  it  is  an  absurd  explanation.  The  reasoning  which 
regards  saving  as  the  original  cause  of  the  formation  of  capi- 
tal seems  hardly  more  satisfactory  :  it  amounts  to  saying 
that  non-destruction  is  one  of  the  causes  of  production,  —  an 
extraordinary  sort  of  logic. 

This  strange  idea  must  have  been  occasioned  by  the  use 
of  money.  To  save,  in  modern  societies,  means  to  put  aside 
a  certain  amount  of  money.  Now  the  man  who  puts  a  hand- 
ful of  coins  in  a  safe  certainly  does  not  create  either  wealth 

1  Senior  and  some  other  economists  expressly  state,  however,  that  tn"e 
three  agents  of  production  are  labor,  natural  agents,  and  abstinence. 

2  The  opinion  that  saving  is  a  form  of  labor  is  held  by  Courcelle-Seneuil ; 
but  as  he  admits  that  the  only  object  of  the  theory  is  to  justify  the  social 
function  of  capitalists  and  the  services  they  render,  we  need  not  stop  to 
discuss  it. 


CAPITAL  131 

or  capital  (he  really  withdraws  some  wealth  from  circula- 
tion), but  since  each  coin  represents  a  claim  to  a  certain 
amount  of  existing  wealth,  it  is  evident  that  whoever  accumu- 
lates these  coins  is  putting  aside  for  future  use  a  certain 
amount  of  wealth  quite  as  real  as  though  he  produced  it  by 
his  labor.  But  this  is  a  purely  individual  point  of  view 
from  which  to  consider  saving. 

It  is  impossible  to  name  a  single  kind  of  wealth  in  society 
that  has  been  created  by  saving.  The  stone  axe  cut  by  qua- 
ternary man  was  not  the  result  of  saving  ;  probably  he  was 
just  as  little  able  to  reduce  his  consumption  as  the  working- 
man  of  to-day  who  earns  just  enough  to  keep  from  starving. 
Not  by  reducing  his  consumption,  but  because  of  a  particularly 
successful  hunt,  providing  an  unusually  large  food-supply, 
was  he  enabled  to  create  his  first  capital.  Is  it  reasonable 
to  suppose  that  in  order  to  pass  from  the  state  of  hunters 
to  that  of  farmers  it  was  necessary  for  a  nation  first  to  save 
enough  food  to  last  a  whole  year  ?  Nothing  is  less  probable. 
Hunting  peoples  simply  domesticated  their  cattle,  and  with 
cattle  as  capital  they  first  obtained  the  leisure  necessary  for 
undertaking  agricultural  labors  that  extend  over  long 
periods  of  time.  But,  as  Bagehot  pertinently  inquires,  how 
does  a  herd  or  flock  represent  abstinence  ?  Has  its  possession 
entailed  privations  on  the  part  of  the  owner  ?  Certainly  not, 
since  the  milk  and  the  meat  have  fed  him,  and  the  wool  and 
the  hide  have  clothed  him,  better  than  he  was  fed  or  clothed 
before. 

It  must  not  be  supposed  that  we  mean  to  question  the 
merit  or  the  virtue  of  saving.  But  although  saving  plays  a 
part,  and  an  important  one,  in  cpjosumption,  we  do  not  per-  :' 
ceive  what  it  has  to  do  with  production.  It  should  be  studied 
in  its  proper  place.  Probably  no  one  would  ever  have 
thought  of  regarding  saving  or  abstinence  as  one  of  the  factors 
of  production,  had  it  not  been  felt,  mistakenly,  that  this 
theory  was  necessary  to  justify  the  payment  of  interest  for 
capital. 


PART  II.  THE  METHODS  OF  PRODUCTION 

CHAPTER  I  — THE  ORGANIZATION  OF 
PRODUCTION 

I.   The  Stages  of  Industrial  Evolution 

BESIDES  its  other  merits,  the  historical  school  may  claim 
the  credit  of  having  discovered  and  outlined  the  successive 
types  of  industrial  evolution.1  It  is  customary  to  distinguish 
five  types  or  periods  :  — 

(1)  The  home  economy  or  family  economy.  This  system 
prevails  not  only  in  primitive  societies  but  even  in  those  of 
antiquity,  and  extends  as  far  as  the  first  period  of  the  Middle 
Ages.  Under  this  system  the  people  are  divided  into  small 
groups,  each  one  of  which  is  independent  of  the  others  from 
the  economic  point  of  view.  Each  group  suffices  unto  itself, 
consuming  hardly  anything  but  what  it  has  itself  produced, 
and  producing  almost  nothing  beyond  what  it  will  consume. 
Exchange  and  the  division  of  labor  exist  only  in  an  embry- 
onic form.  (See  the  pages  on  the  History  of  Exchange  and 
of  Labor.) 

Each  group  consists  of  a  family.  The  term  "family," 
however,  must  be  taken  in  a  wider  sense  than  it  now  pos- 
sesses. Not  only  was  the  patriarchal  family  itself  much  larger, 
but  it  was  made  to  include  many  other  persons,  —  slaves  OP- 
serfs, — who  were  regarded  as  belonging  to  it.  In  Rome 
slaves  were  legally  designated  a,sfamilia.  The  residence  of 
the  wealthy  Roman  landowner,  having  an  army  of  slaves 

1  More  detailed  outlines  of  the  economic  evolution  of  society  may  be  found 
in  these  books:  Thurston,  "  Economics  and  Industrial  History"  ;  Buecher, 
"  Industrial  Evolution  "  ;  Henry  Dyer,  "  The  Evolution  of  Industry." 


ORGANIZATION   OF   PRODUCTION  133 

engaged  in  all  kinds  of  labor,  as  well  as  the  manor  of  the 
medioeval  baron  with  his  serfs,  both  belong  to  this  economic 
period. 

(2)  Corporative  economy,  or  the  guild  system.^  This  system 
makes  its  appearance  in  the  Middle  Ages  and  is  characterized 
by  a  very  important  feature,  viz.,  the  separation  of  trades. 
The  worker,  at  least  in  the  towns,  is  autonomous  ;  generally, 
he  owns  the  raw  material,  and  produces  with  the  aid  of  tools 
that  are  his  own  property.     He  has  become  what  is  called 
an  artisan.     Ordinarily,  he  works  only  "  to  order,"  producing 
such  goods  as  are  requested  in  advance  by  his  customers  ; 
or,  at  least,  he  produces  only  for  the  small  local  market  of 
the  town  in  which  he  lives,  —  a  market  which  he  jealously 
guards.     He  is  associated  with  other  workmen  of  the  same 
trade,  in  a  kind  of  league  for  mutual  assistance  and  defence, 
and  together  with  these  associates  he  helps  form  those  cor- 
porations or  guilds  which  played  so  important  a  part  in  the 
economic,  and  even  in  the  political,  history  of  the  Middle 
Ages. 

(3)  Domestic  economy  (which  must  not  be  confounded  with 
the  home  or  family  economy).     The  workmen  in  the  guilds 
little  by  little  lose  their  independence.     Instead  of  producing 
directly  for  their  customers  or  for  the  public,  they  now  pro- 
duce for  a  wholesale  dealer.     They  work  at  home,  and  some- 
times—  not    always  —  still    own    their   tools    and   the   raw 
material.     But  they  no  longer  own  the  finished  product ;  that 

1  Between  these  first  two  systems,  the  German  school  of  economists,  espe- 
cially Schmoller  and  Buecher,  introduce  another  which  they  call  the  system 
or  period  of  hired  labor, — in  which  the  laborer,  who  was  only  partly  indepen- 
dent, usually  worked  in  the  house  of  the  consumer  with  raw  material  that 
was  provided  by  the  latter.  This  state  of  affairs  was  similar  to  the  present 
habit  of  some  small  artisans  who  wander  about  from  house  to  house,  or  the 
present  custom  among  dressmakers  in  countries  where  they  work  in  the 
homes  of  the  persons  who  employ  them. 

Although  this  system  seems  to  have  continued  several  centuries  in  Germany, 
before  the  establishment  of  the  guild  system,  and  is  very  interesting  as  a 
transitional  step,  it  does  not  appear  ever  to  have  been  sufficiently  predominant 
to  be  regarded  as  a  distinct  stage  of  economic  evolution. 


134  PRINCIPLES    OF    POLITICAL   ECONOMY 

belongs  to  the  dealer.  Why  is  this  intermediary,  the  dealer, 
interposed  between  the  worker  and  the  public  ?  Because  the 
little  town  market  has  been  destroyed  and  has  perforce  given 
way  to  the  national  market ;  and  because  the  workers  of  the 
guilds  were  too  poor,  too  unenterprising,  and  produced  at  too 
great  a  cost  to  obtain  control  of  this  enlarged  market. 

(4)  Organized  manufacture,  or   the   workshop   economy. 
The  intermediary  or  industrial  organizer  now  brings  his  dis- 
persed workmen  together  in  one  place.     Thus  he  gains  sev- 
eral advantages,  principally  that  of  an  extensive  division  of 
labor,  which  increases  productive  capacity  and  at  the  same 
time  reduces  the  cost  of  production.     (Seethe  section  on  the 
Division  of  Labor.)     Henceforth,  the  worker  owns  neither  the 
raw  material  nor  the  implements  of  production  ;  he  no  longer 
works  at  home,  but  has  become  a  wage-worker,  an  employee, 
while  the  intermediary  who  possesses  all  these  things  has  be- 
come an  employer.      But  productive  power  has  thus  been 
increased  to  a  remarkable  degree. 

This  transformation  began  to  take  place  about  the  sixteenth 
century.  It  was  not,  however,  without  a  struggle  that  the 
more  perfect  organization  of  manufacturing  industry  elimi- 
nated the  guilds  and  conquered  the  markets  which  were  closed 
to  it  by  the  guild  regulations.  In  France  the  intervention 
of  the  government  was  necessary  to  accomplish  this  change. 
During  the  ministries  of  Sully  and  of  Colbert  the  government 
founded  manufactories  possessing  special  privileges,  and  some 
of  these  establishments  have  remained  state  concerns  ever 
since  then  (e.g.  the  Gobelin  manufactory  of  tapestries). 
In  England  the  destruction  of  the  guild  system  was  brough^ 
about  chiefly  by  the  exportation  of  goods  on  a  rapidly  in- 
creasing scale  to  foreign  countries  and  British  colonies. 

(5)  Machine  industry  or  the  factory  system.1     This  is  the 
system  which  marks  our   own  epoch.     It   began  with  the 

1  M.  Vandervelde,  a  Belgian  economist,  suggests  the  name  "  machinofac- 
ture  "  as  opposed  to  the  preceding  type  of  "  manufacture."  Etymologically, 
"manufacture"  means  "to  make  by  hand."  Now  it  has  come  to  mean 


ECONOMIC   EVOLUTION  135 

application  of  steam  to  industry  and  transportation.1  It  has 
carried  productive  power  to  its  maximum,  but  has  for  the 
most  part  only  emphasized  the  features  of  the  preceding 
period,  among  which  are :  the  grouping  of  large  numbers 
of  laborers,  night  work,  the  quasi-military  organization  of 
labor,  the  employment  of  women  and  children.2  As  this 
system  requires  constantly  increasing  amounts  of  capital  for 
its  successful  continuance,  it  perpetuates  what  the  socialists 

precisely  the  opposite.  The  word  "factory"  originally  was  merely  an 
abbreviation  of  "  manufactory. "  Four  bases  of  distinction  between  manufac- 
turing and  the  hand  trades  have  been  suggested  by  various  writers  ;  namely, 
the  use  of  power,  the  use  of  machinery,  production  for  the  general  market, 
and  production  under  a  system  of  division  of  labor.  All  of  these  are  un- 
doubtedly characteristics  which  are  usually  associated  with  manufacturing, 
but  no  one  of  them  alone  sufficiently  defines  the  word.  The  twelfth  census 
of  the  United  States  regards  standardization  as  the  true  criterion  for  manu- 
factures, as  opposed  to  hand  trades.  This  term,  "standardization,"  applies 
to  all  operations  which  produce  "standard"  products;  that  is,  similar 
products  which  conform  to  a  general  demand.  Tailoring  and  custom  shoe- 
making,  for  example,  are  not  standardized,  for  dissimilar  articles  are  pro- 
duced, each  being  suited  to  the  taste  and  need  of  the  individual  consumer. 
But  the  manufacture  of  ready-made  clothing  and  shoes  is  standardized,  for 
here  the  products  all  conform  to  a  single  standard,  even  the  variations  for 
sizes  being  standard  variations. 

1  The  remarkable  improvement  in  methods  of  transportation,  which  we 
shall  refer  to  later  in  this  book,  and  the  invention  of  a  multitude  of  mechani- 
cal devices  for  increasing  productive  power,  have  together  effected  so  com- 
plete a  change  in  the  economic  life  of  mankind  during  the  past  century  and 
a  half  that  historians  have  designated  it  as  the  "Industrial  Revolution." 

2  In  1870  the  number  of  persons  engaged  in  gainful  occupations  in  the 
United  States  was  12,505,923;  of  these  the  females  were  1,836,288,  i.e.  one- 
seventh  of  the  total  number  of  females  ten  years  of  age  and  over.     In  1900 
the  whole  number  of  persons  engaged  in  gainful  occupations  was  29,074,117, 
and  of  this  number  5,319,912  were  females,  being  one-sixth  of  the  females 
ten  years  of  age  and  over.     In  the  mechanical  and  manufacturing  industries 
2.53  per  cent  of  the  workers  in  1870  were  women,  whereas  in  1900,  4.65  per 
cent  were  women. 

Despite  various  forces  tending  to  restrict  the  employment  of  young  chil- 
dren, and  frequent  misrepresentation  regarding  the  age  of  employees,  the 
census  figures  indicate  that  in  1870,  13.19  per  cent  of  the  total  number  of 
children  ten  to  fifteen  years  of  age,  inclusive,  were  at  work ;  in  1880,  16.82 
per  cent,  and  in  1900,  18.23. 


136  PRINCIPLES    OF   POLITICAL    ECONOMY 

call  the  regime  of  capitalism.  This  system  has  many  grave 
defects,  which  form  the  subject  of  complaints  that  are  too 
often  justified.  Among  its  objectionable  features  are :  the 
frequency  of  accidents;  the  chronic  unemployment  and  invol- 
untary idleness  of  large  numbers  of  laborers ;  overproduction 
and  the  crises  it  involves ;  the  creation,  at  one  end  of  the 
social  scale,  of  colossal  fortunes,  and,  at  the  other  end,  of  a 
famished  laboring  class  often  forced  to  sell  its  labor  for  a 
crust  of  bread,  —  while  between  these  two  classes  there  is 
a  special  category  of  property  owners  called  stock-holders, 
which  at  first  sight  it  is  difficult  to  distinguish  from  simple 
parasites.  All  these  objectionable  features  of  capitalism  will 
be  discussed  hereafter  in  greater  detail. 

It  is  a  mistake  to  suppose  that  each  of  the  economic  sys- 
tems outlined  above  did  away  entirely  with  its  predecessors. 
We  can  only  say  that  each  of  them  in  turn  predominated. 
Even  to-day,  although  the  factory  is  the  characteristic  method 
of  industrial  production,  we  can  still  find  traces  of  the  home 
economy,  —  where,  for  example,  the  peasant's  wife  spins  the 
flax  that  serves  to  make  the  household  linen ;  and  although 
guilds  have  now  disappeared  from  the  European  cities  in 
which  they  once  held  sway,  there  are  still  many  artisans, 
occupied  in  various  trades,  who  work  principally  for  custom- 
ers that  order  goods  in  advance,  just  as  in  the  Middle  Ages. 

It  also  goes  without  saying  that  we  still  find  considerable 
production  outside  of  the  factories  and  other  large  industrial 
establishments,  but  it  is  especially  "  domestic  economy  "  that 
has  survived  and  that  now,  curiously  enough,  tends  again  to 
gain  ground.  In  the  large  cities  some  important  indus- 
tries —  especially  tailoring  —  are  carried  on  almost  entirely 
in  this  way.  This  strange  revival  of  a  former  industrial  sys- 
tem is  due  probably  to  the  recent  intervention  of  the  legis- 
lative authorities,  which  have  laid  down  certain  rules  for 
the  conduct  of  labor  in  larger  industrial  establishments.  As 
these  labor  laws  apply  especially  to,  factories,  many  industries 


THE   REGULATION   OF   PRODUCTION  137 

find  that,  by  having  the  work  done  in  the  homes  of  the 
laborers,  they  can  easily  escape  legal  surveillance. 

We  might  be  disposed  to  believe  that  this  change  is  a  for- 
tunate one,  and  that  the  workman  is  happier  and  more  free 
when  he  works  at  home,  at  times  that  best  please  him,  and  in 
the  midst  of  his  family,  rather  than  in  the  industrial  barracks 
known  as  "  factories."  Experience,  however,  proves  that  this 
is  not  the  case ;  that,  quite  to  the  contrary,  the  worst  kind  of 
exploitation  takes  place  by  the  method  of  domestic  production, 
to  which  nowadays '  the  characteristic  name  of  "  sweating 
system  "  has  aptly  been  applied.  In  this  form  of  industrial 
organization  the  workman  is  not  only  robbed  of  the  protec- 
tion of  the  laws  concerning  hours  of  labor,  the  work  of 
women  and  children,  necessary  hygienic  precautions,  etc., 
but  he  is  also  entirely  in  the  control  of  intermediaries  or 
contractors,  who  are  interposed  between  him  and  the  large 
manufacturer,  and  who  deprive  him  of  part  of  the  gain  which 
his  toil  should  bring  him.  He  is,  moreover,  constantly  ex- 
posed to  the  imminent  danger  of  losing  employment,  and  to 
the  risk  of  irregular  work ;  for  whereas  the  proprietor  of  a 
factory,  unable  to  close  it  without  great  loss,  prefers  to 
work  at  a  small  loss  rather  than  allow  his  enormous  capital 
to  lie  idle,  the  contractor  under  the  sweating  system  has  no 
care  of  this  nature. 


II.  How  Production  is  Regulated 

Economic  equilibrium  exists  when  wealth  and  services 
are  produced  in  just  the  quantity  necessary  to  meet  the 
demand.  Not  to  produce  enough  is  an  evil,  since  a  certain 
number  of  wants  will  be  unsatisfied.  To  produce  too  much 
is  another  evil,  perhaps  not  so  great  as  the  former,  but 
none  the  less  real.  Every  excess  in  production  necessarily 
involves  not  only  a  waste  of  wealth,  but  also  a  useless 
expenditure  of  energy,  and  consequently  unnecessary  toil 
and  trouble.  A  state  of  health  in  the  social  body,  as  in  the 


138  PRINCIPLES    OF    POLITICAL   ECONOMY 

human  body,  consists  in  the  perfect  equilibrium  of  production 
and  consumption. 

When  each  man  produces  what  he  consumes,  as  in  the 
first  stage  of  economic  evolution,  described  above,  the  equilib- 
rium is  maintained  easily  enough.  To  a  certain  degree,  each 
individual,  and  each  small  family  group,  is  able  to  foretell  the 
wants  of  the  immediate  future,  and  although  this  prevision 
may  not  always  be  strictly  correct,  production  can  be  regu- 
lated accordingly.  But  when  division  of  labor  and  exchange 
have  been  introduced,  the  problem  is  more  difficult,  for  then 
it  is  necessary  to  foretell  the  wants  of  others,  —  a  more  com- 
plex matter  than  to  foretell  our  own  wants.  Yet  the  problem 
is  not  very  difficult  when  laborers  work  "  to  order,"  for  then 
each  consumer  declares  what  he  wants.  Nor  is  the  problem 
very  difficult  in  small  industries;  the  baker  can  estimate 
pretty  accurately  the  number  of  loaves  that  will  be  sold  in  a 
day. 

But  the  problem  really  becomes  complicated  in  an  eco- 
nomic society  like  our  own,  in  which  the  market  is  immense, 
and  in  which  a  great  number  of  industries  produce  their 
goods  in  advance  without  awaiting  orders,  and  where  com- 
merce —  especially  speculative  commerce  —  anticipates  the 
wants  of  society. 

Political  economy,  especially  classical  political  economy, 
teaches  that  production  is  regulated  surely,  rapidly,  and 
automatically,  by  the  law  of  supply  and  demand,  operating 
by  virtue  of  this  principle:  "Things  are  worth  more  or  lesi-T 
according  to  the  insufficiency  of  their  quantity  for  the  satis- 
faction of  our  wants."  If  it  should  happen  that  any  branch 
of  industry  is  not  sufficiently  provided  with  labor  and  capi- 
tal, the  want  which  it  is  designed  to  satisfy  is  not  fully  met, 
and  the  goods  which  it  produces  acquire  a  higher  value. 
The  producer,  particularly  the  industrial  manager  who  is  the 
principal  guide  of  production  and  the  first  person  to  profit 
by  a  rise  in  prices,  realizes  greater  gains.  Attracted  by  the 
prospect  of  gains  higher  than  the  average,  other  producers  — 


THE  REGULATION  OF  PRODUCTION         139 

capitalists  and  laborers  —  engage  in  this  favored  industry. 
In  this  wise  the  production  of  goods  is  increased  until  the 
quantity  reaches  the  amount  desired  by  the  public. 

When,  on  the  other  hand,  any  commodity  has  been  pro- 
duced in  quantities  exceeding  the  need,  its  value  must  fall. 
This  fall  in  value  reduces  the  income  of  the  producer,  and 
particularly  the  profits  of  the  industrial  manager,  who  must 
directly  bear  the  consequences.  He  will  not  continue  an 
industrial  policy  that  means  loss  or  failure,  and  the  produc- 
tion of  this  particular  commodity  is  slackened  until  the 
output  has  fallen  to  the  level  of  the  amount  consumed. 

In  these  oscillations  the  value  of  all  goods  tends  con- 
stantly towards  a  fixed  point,  just  as  a  pendulum  in  motion 
tends  to  a  vertical  position,  or  as  water  seeks  a  perfect  level. 
This  fixed  point  is  determined  by  the  cost  of  production,  a 
term  which  designates  the  sum  of  values,  in  goods  or  in 
services,  consumed  in  the  production  of  a  commodity,  and 
which  includes  :  the  wages  of  labor,  interest,  insurance,  the 
renewal  of  capital,  the  cost  of  transportation,  taxes,  and  the 
price  of  the  raw  material  (which  is  in  turn  made  up  of 
the  elements  just  enumerated). 

When  the  value  of  an  object  is  equal  to  its  cost  of  produc- 
tion, it  is  in  the  position  of  equilibrium ;  we  say  that  its  value 
is  normal. 

The  conception  of  the  mechanism  of  production  outlined 
in  the  above  paragraphs  is  one  of  the  celebrated  "  economic 
harmonies  "  of  Bastiat  and  the  liberal  school,  according  to 
which  all  productive  activity  regulates  itself  automatically. 
But  for  the  economic  mechanism  to  operate  thus  admirably 
in  actual  practice,  many  conditions  are  necessary  that  are 
but  rarely  fulfilled.  The  supply  must  respond  immediately 
to  the  demand,  and  the  demand  must  immediately  take 
advantage  of  the  supply ;  the  factors  of  production  must 
be  absolutely  mobile  ;  they  must  change  their  position  with 
electrical  rapidity,  abandoning  the  employments  in  which 
they  are  superabundant,  and  taking  up  those  in  which 


140  PRINCIPLES    OF    POLITICAL    ECONOMY 

they  are  insufficient.  This  theory  of  automatic  equilibrium, 
moreover,  presupposes  a  single  market  embracing  the  world, 
or  at  least  markets  that  are  closely  united,  like  communicating 
jars  of  water,  so  that  whenever  the  equilibrium  is  disturbed 
it  is  almost  instantaneously  reestablished.  The  economic 
world  is  evidently  tending  toward  just  this  state  of  affairs ; 
but  it  is  yet  far  from  having  realized  it. 

Now  farming  and  even  manufacturing  —  in  fact  all  pro- 
duction—  presupposes  that  capital  is  engaged  in  it  for  a 
greater  or  less  time,1  and  that,  being  fixed,  it  is  no  longer 
transferable  at  will  from  one  productive  branch  to  another. 
Suppose,  for  instance,  that  a  wine-raiser  produces  too  much 
wine,  and  feels  that  he  should  turn  his  attention  to  the  pro- 
duction of  something  else.  We  are  told  by  the  liberal  econ- 
omists that  the  law  of  supply  and  demand  (which  in  his 
opinion  may  hardly  be  regarded  as  either  "  harmonious  "  or 
"beneficial")  will  oblige  him  to  do  this.  But  what  is  he 
going  to  do  with  the  thousands  of  dollars  of  capital  invested 
in  wine-raising,  and  consisting  of  vineyards,  wine  cellars,  etc.? 
Much  of  this  capital  lies  irretrievably  buried  in  the  soil,  and 
he  cannot  afford  to  abandon  it. 

Supply  and  demand,  even  where  they  operate  most  freely, 
do  not  always  bring  about  a  distribution  of  products  and 
services  that  is  for  the  best  interest  of  society.  This  is  strik- 
ingly true  of  trades  and  professions.  The  most  useful  voca- 
tions—  for  example,  farming  —  tend  to  become  abandoned, 
while  others  that  are  least  productive,  like  store-keeping  and 
saloon-keeping  (not  to  mention  the  government  service),  are 
sought  with  great  persistency,  and  the  number  of  persons 
engaged  in  them  increases  at  an  amazing  rate. 

Is  this,  then,  an  exception  to  the  law  of  supply  and  de- 
mand ?  Certainly  not.  The  law  applies  here,  as  elsewhere, 
but  absolutely  without  regard  for  social  usefulness.  Indeed, 
we  have  already  explained  that  value  is  entirely  independent 
of  social  utility,  and  that  it  depends  on  human  desire,  which 
1  See  the  section  on  Fixed  and  Circulating  Capital,  page  127. 


THE  REGULATION  OF  PRODUCTION         141 

is  an  entirely  different  matter.  Between  the  scale  or  order 
of  real  wants,  such  as  a  moralist,  a  statesman,  or  a  hygienist 
would  draw  up,  and  the  scale  of  economic  values,  there  is  no 
uniformity,  no  parallelism  whatever. 

For  this  reason  it  was  thought  formerly  that  the  distribu- 
tion of  trades,  professions,  and  occupations  should  not  be  left 
to  the  law  of  supply  and  demand.  The  old  industrial  systems, 
based  on  slavery  or  castes  or  guilds,  all  possessed  the  common 
feature  of  regulating,  by  right  of  laws  or  of  heredity,  the 
number,  duties,  and  rank  of  those  engaged  in  various  occupa- 
tions, and  of  subjecting  them  to  certain  restrictions.  The 
predominant  principle  was  that  no  one  could  enter  any  trade 
or  profession  without  the  authorization  of  the  government  or 
of  the  guild. 

It  is  well  known  that  the  French  Revolution  put  an  end,  by 
law,  to  trade  corporations  or  guilds,  and  proclaimed  the  prin- 
ciple of  the  liberty  of  labor,  by  which  no  one  should  be  pre- 
vented from  engaging  in  any  trade  whatever.  This  reform 
was  welcomed,  throughout  Europe  and  soon  imitated  by 
almost  all  western  nations. 

The  principle  of  free  labor  must  be  maintained  because  it 
is  an  essential  part  of  human  liberty  ;  it  should  be  made  to 
penetrate  even  those  fields  of  activity  in  which  it  does  not 
yet  prevail.  But  it  is  perfectly  natural  that  unregulated 
production  should  overthrow  the  perfect  adjustment  of  pro- 
duction to  consumption 1  and  cause  those  disturbances  of  the 
economic  equilibrium  which  are  called  crises. 

1  It  has,  nevertheless,  been  objected  that  there  were  more  famines  in  those 
days  than  now,  although  the  production  of  wheat,  and  trade  in  it,  were 
hedged  about  by  a  multitude  of  regulations.  (In  some  places  it  was  even 
forbidden  to  substitute  wine-raising  for  wheat-growing.)  We  must  acknowl- 
edge that  free  competition  has  indeed  rendered  great  services  in  the  produc- 
tion of  wheat,  because  this  is  one  of  the  few  cases  in  which  the  theoretical 
state  of  free  competition  has  in  fact  been  nearly  realized  ;  the  wheat  market 
is  almost  the  ideal  of  a  world  market,  and  would  even  more  closely  approach 
this  ideal  if  protective  duties  did  not  place  obstacles  in  the  way  of  free  com- 
petition. 


142  PRINCIPLES    OF   POLITICAL    ECONOMY 

III.  Crises 

The  automatic  regulation  of  production  just  explained, 
which  is  founded  solely  on  free  competition,  is  very  uncertain. 
It  is  subject  to  disturbance,  —  even  frequent  disturbance. 
Whenever  the  proper  equilibrium  is  disturbed,  we  say  that 
there  is  a  crisis. 

Crises  have  often  been  called  the  diseases  of  the  economic 
organism  ;  their  nature  is  as  varied  as  that  of  the  innumer- 
able ailments  that  afflict  mankind.  Some  are  periodic,  and 
others  are  wholly  irregular.  Some  are  short  and  violent, 
like  attacks  of  fever  ;  others  are  slow,  "like  anaemia  "  — to  use 
M.  de  Laveleye's  phrase.  Some  are  confined  to  a  particular 
country,  others  are  epidemic  and  travel  round  the  world. 

Some  economists  have  attempted  to  construct  a  general 
theory  of  crises,  and  to  describe  the  laws  that  determine  them.1 
Such  attempts  must  be  regarded  as  premature.  We  may  of 
course  discover  common  characteristics  in  crises,  and  find 
them  related  to  a  single  fundamental  cause  such  as  that 
which  we  have  already  mentioned,  viz.,  a  sudden  disturbance 
of  the  economic  equilibrium,  either  in  the  production  of  many 
commodities  or  in  the  production  of  a  single  very  important 
commodity,  such  as  wheat,  capital,  metallic  money,  or  credit 
instruments.  In  each  of  these  cases,  which  we  now  pur- 
pose to  investigate,  the  disturbance  of  equilibrium  is  due  to 

1  Stanley  Jevons  undertook  to  do  this.  After  carefully  describing  crises, 
he  concluded  that  they  took  place  periodically,  —  once  every  ten  years. 
Since  the  beginning  of  the  nineteenth  century  he  found  that  there  had  been 
nine  crises,  in  the  years  1815,  1827,  1836,  1839,  1847,  1857,  1866,  1873,  and 
1878.  This  recurrence  is  due,  according  to  Jevons,  to  an  analogous  repetition 
of  bad  crops,  which  is  in  turn  caused  by  the  recurrence,  every  ten  years,  of 
spots  on  the  sun  !  In  this  manner  the  problem  of  crises  and  their  periodicity 
is  reduced  to  a  problem  of  astronomy. 

An  excellent  history  of  the  theories  regarding  crises  is  given  by  von  Berg- 
mann,  "  Geschichte  der  nationaloekonomischen  Krisentheorien,"  Stuttgart, 
1895.  Consult  also:  Jones,  "Economic  Crises"  (Macmillan,  1900);  de 
Laveleye,  "Le  marche  monetaire  et  ses  crises  ";  Juglar,  "Des  crises  com- 
inerciales  et  de  leur  retour  p6riodique." 


ECONOMIC   CRISES  143 

a  glut  or  a  dearth  of  goods.  It  would  seem  that  a  dearth  of 
goods  is  much  more  dangerous  than  a  superabundance,  and 
yet,  as  we  shall  see  presently,  the  latter  is  more  dreaded, 
except  in  the  case  of  a  superabundance  of  money. 

(1)  A  general  glut  or  scarcity  of  products.  A  general 
glut  is  one  of  the  most  frequent  forms  of  economic  crises, 
and  may  even  be  regarded  as  a  kind  of  chronic  ailment,  a 
sort  of  constitutional  infirmity,  of  modern  industry.1  The 
development  of  large-scale  production,  modern  inventions, 
and  means  of  transportation  have  enabled  industry  to  throw 
such  enormous  masses  of  products  on  the  market  that  con- 
sumption cannot  always  keep  pace  with  production.  This 
is  not  because  men's  wants  are  small  or  limited  in  number, 
—  for  we  know  that  they  are  great  and  that  they  are  even 
capable  of  unlimited  increase,  —  but  because  the  sale  of  an 
article  does  not  depend  solely  on  the  number  of  people  that 
desire  it  but  on  the  number  of  those  that  have  the  means  of 
buying  it.  Now  the  increase  in  'income  of  the  bulk  of  the 
population  usually  has  not  been  so  great  as  the  growth  of 
manufactures.  Moreover,  nearly  all  countries  now  seek  to 
close  their  markets  to  foreign  products,  and  at  the  same  time 
try  to  introduce  their  own  products  into  other  lands.  Thus 
products  are  by  various  devices  kept  out  of  certain  markets 
and  confined  to  others,  as  though  accumulated  in  closed 
reservoirs.  Producers,  therefore,  in  order  to  find  an  open- 
ing for  their  goods,  and  to  have  them  gradually  absorbed 
by  consumption,  are  obliged  to  lower  prices  and  to  decrease 
their  output  for  a  while  ;  this  general  fall  of  prices  means, 
for  the  employers,  lower  profits  or  failures,  while  for  the 
laborers  it  means  lower  wages  or  loss  of  work. 

Crises  caused  by  the  inverse  difficulty  (scarcity  of  goods) 
may  in  certain  cases  be  quite  as  formidable.  We  need  only 

1  The  collectivists  attach  great  importance  to  this  kind  of  crisis,  which  in 
their  opinion  constitutes,  properly  speaking,  not  a  crisis  but  a  necessary  con- 
sequence of  the  present  capitalistic  regime,  and  which,  being  a  cause  as  well 
as  an  effect,  must  inevitably  involve  the  complete  overthrow  of  our  modern 
industrial  organization. 


144  PRINCIPLES   OF   POLITICAL   ECONOMY 

refer,  as  an  example,  to  the  so-called  "  cotton  famine  "  which 
resulted  from  the  American  Civil  War,  and  which,  because 
of  the  lack  of  the  necessary  raw  material  in  many  European 
cotton  mills,  led  to  the  discharge  of  large  numbers  of  work- 
men and  the  ruin  of  many  manufacturers  of  cotton  goods. 
A  bad  harvest  of  cereals  may  cause  terrible  famines  in  poor 
countries  like  India  or  Algeria;  even  in  wealthy  countries, 
such  as  those  of  western  Europe,  a  slight  deficiency  in  the 
supply  of  wheat  always  provokes  some  sort  of  a  crisis. 

It  may  even  happen  —  although  the  event  appears  para- 
doxical—  that  the  crisis  due  to  a  dearth  of  some  one  com- 
modity will  produce  the  same  results  as  a  crisis  due  to  an  ex- 
cess in  production,  namely  a  general  glut  of  the  market  and  a 
depreciation  of  commodities.  A  shortage  in  the  wheat  crop, 
for  instance,  causes  a  rise  in  the  price  of  wheat ;  hence  all 
consumers  of  wheat  whose  means  are  limited,  that  is  to  say 
the  great  majority  of  people,  are  compelled  to  lower  their  ex- 
penditures for  all  the  other  articles  which  they  purchase. 
In  this  way  there  is  a  mass  of  goods  that  no  longer  finds  pur- 
chasers, and  that  can  be  disposed  of  only  at  a  loss,  or  must 
be  kept  unsold.  This  curious  state  of  affairs  is  illustrated 
by  famines  in  India,  which  generally  cause  a  crisis  for  Eng- 
lish manufacturers. 

(2)  A  glut  or  a  dearth  in  some  factors  of  production.  A 
disturbance  of  the  proper  relative  quantities  of  the  factors 
of  production  is  still  more  frequent  and  even  more  grave 
than  a  disturbance  of  the  equilibrium  among  products  them- 
selves. In  no  productive  enterprise  can  the  factors  of 
production  be  brought  together  .in  a  haphazard,  reckless 
fashion,  i.e.  without  due  regard  for  their  proportion  to  each 
other.  The  chemical  law  of  so-called  "  definite  propor- 
tions" reigns  in  this  field  quite  as  fully  as  in  chemistry; 
M.  Walras  and  M.  Pareto  call  it  the  "law  of  the  co- 
efficients of  production."  Successful  production  always 
requires  a  certain  amount  of  land,  a  proportionate  amount 
of  labor,  and  a  proportionate  quantity  of  fixed  and  of 


ECONOMIC   CRISES  145 

circulating  capital.  These  productive  elements,  it  is  true, 
may  to  some  extent  be  substituted  for  each  other  ;  but  not 
ad  libitum.  Often  there  is  too  much  or  too  little  of  one  of 
these  elements,  —  not  enough  labor  or  capital  for  the  land 
at  our  disposal,  or,  inversely,  not  enough  land  to  keep  busy 
all  the  laborers  or  to  use  all  the  capital,  or,  perhaps,  more 
capital  than  is  required  by  the  number  of  laborers  employed, 
or  vice  versa. 

The  amount  of  land  in  a  country  is  limited  by  nature ;  to 
increase  it  is  beyond  the  power  of  man.  The  number  of 
laborers  depends  on  the  laws  (only  imperfectly  understood) 
of  population,  and  hence  may  also  be  said  to  have  certain 
limits.  But  the  quantity  of  capital  does  not  seem  to  have 
any  limit  at  all.  In  advanced  countries  where  incessant 
saving  accumulates  increasing  quantities  of  wealth,  where  all 
normal  chances  of  profit  have  been  seized,  and  the  opportu- 
nities for  further  investments  tend  to  decrease,  capital  must 
ultimately  be  accumulated  in  huge  quantities.  Naturally 
this  abundance  causes  a  fall  in  the  rate  of  interest,1  and  men 
try  to  devise  more  profitable  investments  ;  new  enterprises 
are  begun,  either  abroad  or  at  home,  some  of  them  of  an  ex- 
traordinary nature,  and  some  altogether  absurd,  until  finally 

1  There  is,  however,  a  difference  between  commodities  and  capital ;  al- 
though the  glut  of  commodities  lowers  prices  and  ruins  producers,  a  glut 
in  capital,  on  the  other  hand,  raises  the  value  of  capital  and  momentarily 
enriches  the  capitalists.  This  result,  which  at  first  seems  singular,  is  not 
difficult  to  explain.  The  fall  in  the  rate  of  interest  changes  the  basis  of  capi- 
talization for  the  future,  but  the  capital  already  invested  profits  necessarily 
by  this  circumstance. 

An  example  will  make  this  clearer.  Suppose  that  to-day  the  rate  of  inter- 
est is  5  per  cent.  Stock  which  yields  an  annual  income  of  $10  is  therefore 
worth  $200.  Suppose  that  to-morrow,  by  reason  of  a  glut  in  capital,  the  rate 
of  interest  for  new  investments  falls  to  3  per  cent.  Then  the  stock  which 
brought  an  annual  income  of  $10,  and  which  continues  to  bring  that  amount, 
is  worth  $333,  since  3  per  cent  of  $333  is  $10. 

The  result  of  this  strange  circumstance  is  that  although  merchants  com- 
plain of  a  glut  in  commodities,  capitalists  rejoice  in  a  glut  of  capital.  The 
fortunate  position  of  capitalists  who  have  already  invested  at  the  old  rate 
cannot,  however,  continue  forever ;  either  some  crisis  will  lower  the  value 


146  PRINCIPLES   OF   POLITICAL  ECONOMY 

there  comes  what  in  stock-exchange  language  is  called  a 
"  crash."  Many  of  these  industrial  collapses  are  sadly  prom- 
inent in  the  economic  history  of  recent  years,  especially  those 
of  1819,  1837,  1857,  and  1873  in  this  country,  and  those  of 
Vienna  in  1873  and  Paris  in  1882. 

The  opposite  state  of  affairs  is  also  possible,  namely  in- 
sufficiency of  capital,  which  may  follow  such  crashes  as 
those  we  have  just  mentioned,  or  which  may  be  due  to  the 
use  of  vast  amounts  of  capital  in  a  costly  war.  When  capi- 
tal is  insufficient,  there  may  also  be  a  crisis,  but  one  marked 
by  conditions  opposite  to  those  set  forth  above,  namely 
by  a  rise  in  the  rate  of  interest  and  of  discount,  and  diffi- 
culty in  obtaining  money. 

Finally,  there  may  be  a  disturbance  of  the  normal  pro- 
portion between  fixed  and  circulating  capital,  the  amount 
of  circulating  capital  being  relatively  insufficient.  This 
has  happened  in  countries  which,  having  imprudently 
devoted  all  their  savings  to  the  construction  of  railroads, 
have  nothing  to  spend  in  developing  their  industries  and 
consequently  no  traffic  for  the  very  railways  they  have 
constructed. 

(3)  Excess  or  scarcity  of  money.  Although  money  is 
really  only  a  commodity,  yet  it  plays  so  important  and  char- 
acteristic a  part  in  economic  life,  that  every  departure  from 
the  normal  amount  of  it  will  affect  the  whole  economic 
mechanism. 

Can  an  excess  of  money,  like  an  excess  of  other  commodi- 
ties, cause  a  crisis  ?  The  general  public  would  regard  the 
fear  that  there  might  be  too  much  money  as  absurd,  and 
refuse  to  admit  that  it  may  involve  a  crisis.  But  it  cannot 
be  denied  that  there  is  a  certain  proportion  between  the 
amount  of  money  that  ought  to  be  in  circulation  in  a  coun- 

of  their  investment,  or  the  changed  rate  of  interest  will  be  sooner  or  later 
applied  to  their  investments  also  —  when  the  time  comes  for  returning  the 
borrowed  capital.  Ultimately,  the  abundance  of  capital  must  necessarily 
reduce  the  power  of  capitalists. 


OVERPRODUCTION  147 

try,  and  the  needs  of  that  country  ;  if  the  amount  is  sud- 
denly increased,  a  crisis  results.  The  crisis  takes  the  form 
of  a  general  rise  of  prices,  and  has  very  serious  consequences 
for  all  consumers,  particularly  for  creditors  and  persons 
living  on  fixed  incomes. 

It  may  be  said,  of  course,  that  when  we  have  to  do  with 
metallic  money,  especially  with  gold,  it  is  easy  for  a  country 
to  dispose  of  its  excess,  and  that  it  is  in  the  very  nature  of 
things  for  the  excess  to  vanish.  But  this  is  not  true  when 
the  money  is  paper  money  or  even  bank  notes.  (See,  below, 
the  section  on  Paper  Money.) 

A  diminution  in  the  quantity  of  money  is  regarded  by 
every  one  as  a  danger,  ancl  always  occasions  great  alarm. 
This  alarm  is,  no  doubt,  partly  due  to  certain  preconceived 
false  notions  regarding  the  part  played  by  money  ;  yet  it  is 
not  entirely  unfounded.1  When  the  balance  of  trade  has 
long  been  unfavorable  to  a  country,  and  its  reserve  of  coin 
is  not  large,  a  time  comes  when  it  no  longer  has  enough 
money.  Then  the  cash  reserves  in  the  banks  diminish, 
exchange  becomes  unfavorable,  the  rate  of  discount  is  raised, 
and  many  merchants,  unable  to  meet  their  engagements,  be- 
come bankrupt.  Such  conditions  as  this  are  called  monetary 
crises.  They  are  the  most  dangerous  of  all,  for  they  seem 
to  possess  a  thoroughly  epidemic  character ;  but  they  have 
also  been  most  carefully  studied,  and  their  arrival  can  be 
most  readily  foreseen  and  therefore  most  successfully  fore- 
stalled. (See  the  section  on  Rises  in  the  Rate  of  Discount.) 

IV.   Overproduction  and  the  Law  of  Markets 

The  fear  of  an  excess  in  production,  of  a  general  glut,  is  a 
nightmare  that  haunts  the  minds  of  all  business  men.  The 
feeling  is  not  hard  to  understand.  Every  producer,  observ- 

1  M.  de  Laveleye  regards  this  as  the  sole  fundamental  cause  of  crises. 
Many  economists  thought  that  the  last  European  crisis,  i.e.  the  depression 
of  prices  during  fifteen  years,  was  due  to  the  scarcity  of  gold.  This  question 
is  discussed  by  Hector  Denis,  "La  depression  des  prix." 


148  PRINCIPLES    OF   POLITICAL   ECONOMY 

ing  that  his  goods  sell  the  better  the  scarcer  they  are  in  the 
market,  naturally  concludes  that  scarcity  is  a  good  and 
abundance  an  evil. 

The  economists  of  the  classical  or  optimistic  school  do  not 
like  to  admit  the  possibility  of  any  discord  in  the  economic 
harmony  which  they  never  tire  of  explaining  and  glori- 
fying. They  are  unwilling  to  acknowledge  that  crises  are 
consequences  of  economic  liberty.  They  have  long  tried  to 
prove  that  the  steady  increase  of  products  is  advantageous 
not  only  for  the  consumers  —  for  that  goes  without  saying  — 
but  also  for  the  producers  themselves.  Of  course  they  do 
not  undertake  to  prove  that  there  cannot  be  an  excess  of 
production  in  a  particular  industry,  nor  that  such  an  excess  is 
anything  but  a  misfortune.  But  they  maintain  that,  when 
there  is  a  glut  in  any  branch  of  production,  the  best  remedy 
consists  in  a  proportionate  increase  in  the  production  of 
other  goods.  The  crisis  resulting  from  abundance  can,  they 
claim,  only  be  cured  by  abundance  itself,  according  to  tjie 
celebrated  motto  of  the  homeopaths  —  similia  similibus. 
Hence  all  producers  are  interested  in  making  production  as 
abundant  and  as  varied  as  possible.  This  theory,  known  as 
the  law  of  markets  (la  loi  des  debouches),  was  first  promul- 
gated by  Jean  Baptiste  Say,  who  was  very  proud  of  it  and 
who  asserted  that  it  would  change  the  policy  of  all  nations. 
It  may  be  summarized  as  follows  :  Every  commodity  will 
find  a  sale  more  readily  with  every  increase  in  the  variety 
and  abundance  of  other  commodities. 

To  understand  this  theory,  let  us  leave  money  out  of 
consideration,  and  suppose  that  products  are  exchanged 
directly  for  products,  as  under  the  system  of  barter.  Take 
a  trader  arriving  at  one  of  the  great  markets  of  Central 
Africa.  Is  it  not  advantageous  for  him  to  find  the  market 
fully  supplied  with  numerous  commodities  ?  Of  course  he 
does  not  care  to  find  the  market  fully  supplied  with  the 
particular  commodity  that  he  has  to  offer,  say  muskets,  but 
he  does  want  to  find  the  greatest  possible  quantity  of  all 


OVERPRODUCTION  149 

other  goods,  —  ivory,  gum,  gold-dust,  etc.  Every  new  com- 
modity that  is  put  on  the  market  means  a  greater  possibility 
of  disposing  of  his  own  commodity,  or,  as  this  theory  puts 
it,  an  additional  market  for  his  goods.  The  more  other  goods 
there  are  for  which  he  can  exchange  his  goods,  the  better  are 
his  chances  of  disposing  of  them.  And  if  our  trader  has 
unfortunately  brought  too  many  muskets,  he  hopes  that 
others  have  also  brought  too  much  of  their  goods  to  the 
market ;  in  this  case  muskets  are  no  longer  in  excess,  as 
compared  with  other  goods  ;  and  as  J.  B.  Say  remarks, 
"  What  best  favors  the  sale  of  one  commodity  is  the  produc- 
tion of  another." 

The  same  thing,  we  are  told,  takes  place  under  the  system 
of  exchange  by  means  of  money.  The  greater  the  resources  of 
all  other  persons,  the  better  is  the  opportunity  that  each  of 
us  has  of  disposing  of  his  goods  or  his  services  ;  and  the 
quantity  of  my  resources  depends  on  the  amount  I  have 
produced.  The  best  we  can  wish  for  a  person  who  has  pro- 
duced a  commodity  in  excess,  is  that  all  other  producers  have 
done  the  same ;  the  abundance  of  one  commodity  is  counter- 
balanced by  that  of  other  commodities.  If,  for  example,  Eng- 
land has  produced  too  much  cotton  goods,  and  India  has 
simultaneously  produced  too  much  wheat,  there  is  no  danger 
that  England  will  be  unable  to  dispose  of  her  cottons. 

Again,  let  us  suppose  (a  supposition  which  coincides  with 
present  conditions)  that  industry,  thanks  to  the  marvellous 
increase  of  productive  power,  throws  an  enormous  quan- 
tity of  manufactured  goods  on  the  market.  The  result  is  a 
general  glut.  Why  ?  Because  agricultural  production  has 
not  kept  pace  with  manufacturing  ;  it  has  increased  only 
slightly,  and  consequently  the  value  of  agricultural  goods 
has,  compared  with  the  value  of  manufactured  goods,  in- 
creased. In  this  case  the  consumers,  who  are  obliged  to 
spend  more  for  their  food-stuffs,  are  unable  to  purchase 
many  manufactured  goods.  But  if  agricultural  production 
progresses  as  rapidly  as  manufacturing,  the  equilibrium  is 


150  PRINCIPLES    OF    POLITICAL    ECONOMY 

again  established  ;  the  consumer,  spending  less  for  his  food, 
will  readily  purchase  the  excess  of  manufactured  goods. 

Notwithstanding  these  circumstances,  and  even  supposing 
that  all  products  without  exception  increase  in  quantity, 
there  may  still  be  a  fall  in  prices  and  consequently  a  general 
glut.  For  our  hypothesis,  as  above  stated,  did  not  include 
an  increase  in  the  amount  of  money.  Therefore  the  value- 
relation  between  money  and  commodities  in  general  has 
changed.  Since  money  is  scarce,  prices  fall.  But  if  we 
could  increase  money  in  the  same  proportion  as  other  com- 
modities, the  evil  would  be  removed,  for  then  the  relation 
of  values  —  called  price  —  would  not  have  changed,  and  the 
crisis  would  not  take  place.  We  may,  therefore,  declare 
that  even  this  hypothesis  confirms  the  economic  law  of 
markets.  To  sum  up,  then,  we  may  say  that  the  theory  of 
markets  simply  shows  that  there  is  no  danger  in  an  excess 
of  production  whenever  the  increase  takes  place  simultaneously 
and  proportionately  in  all  branches  of  production.  It  is 
perfectly  evident  that  in  this  case  the  relations  between 
the  quantities  exchanged  are  exactly  the  same  as  before, 
although  the  total  quantities  have  increased. 

Unfortunately,  the  increase  of  production  never  takes 
place  under  the  conditions  required  by  the  theory  of  mar- 
kets. There  is  not  one  chance  in  a  million  that  an  equal 
increase  will  ever  occur  simultaneously  in  all  branches  of  pro- 
duction. Production  increases  by  sudden  leaps  and  by  local, 
intermittent  changes.  Besides,  before  we  can  make  any 
practical  use  of  the  law  of  markets,  nations  must  tear  down 
the  walls  of  protective  duties  which  prevent  an  excess  of 
commodities  in  one  country  from  pouring  out  into  other  coun- 
tries and  thus  establishing  a  level  in  the  universal  market. 

This  is  why  these  disturbances  of  equilibrium  in  exchange, 
these  crises  which  we  have  analyzed,  remain  an  inherent  evil 
of  our  economic  organization.1  This  is  also  why  producers 

1  The  collectivist  school  of  socialists  regards  overproduction  as  an  inevita- 
ble consequence  of  the  exploitation  of  laborers.  The  working-classes,  they 


FREE   COMPETITION  151 

nowadays  seek  to  regulate  production  by  means  of  commer- 
cial agreements  known  as  trusts  and  pools,  —  perhaps  the 
most  interesting  economic  phenomena  of  to-day.  Some- 
times, it  is  true,  these  combinations  undertake  to  limit  the 
quantity  of  a  commodity  on  the  market  in  order  simply 
to  raise  its  price  quickly.  In  this  event  they  are  speculative 
schemes,  very  much  like  that  which,  under  the  guild  system, 
was  called  "engrossing";  to  "engross"  meant  to  buy  up 
the  entire  supply,  or  so  much  of  it  as  not  to  allow  other 
persons  to  get  what  they  needed.  Generally,  the  members 
of  these  modern  combinations  agree  not  to  produce  beyond 
a  certain  limit ;  in  this  case  their  influence  may  be  benefi- 
cial. (See  the  section  on  Large-scale  Production.) 

V.   Competition 

•The  law  of  supply  and  demand,  to  be  true  in  practice, 
requires  freedom  of  labor ;  and  freedom  of  labor  in  its  active 
form  is  called  free  competition.  Competition,  then,  appears 
to  be  the  great  regulator  of  the  whole  economic  mechanism 
of  modern  society.  It  was  formerly  customary  in  most 
treatises  on  political  economy  to  enumerate  the  advantages 
of  free  competition  and  the  disadvantages  of  monopoly.  It 
was  generally  agreed  to  attribute  to  competition  the  follow- 
ing good  results  :  — 

(1)  It  adapts  production  to  consumption,  and  thus  main- 
tains the  economic  equilibrium. 

(2)  It  gives  a  great  impetus  to  production,  stimulating 
progress  by  means  of  rivalry,  and  effecting  in  the  economic 

declare,  are  robbed  by  the  capitalists  of  about  half  the  product  of  their  toil, 
and,  therefore,  with  the  wages  they  receive,  are  unable  to  buy  back  the 
product  of  their  labor.  Hence  the  glut.  If  the  workers  received  what  is 
due  them,  and  their  powers  of  consumption  were  thus  made  equal  to  their 
powers  of  production,  there  could  be  no  more  crises. 

This  explanation  does  not  seem  quite  satisfactory.  Even  granting  the  fact 
of  spoliation,  such  spoliation  would  mean  that  the  power  to  consume  has 
simply  been  transferred  from  one  class  to  another  ;  and  it  is  difficult  to  see 
why  the  spoliators  should  not  consume  as  much  as  the  despoiled. 


152  PRINCIPLES    OF   POLITICAL   ECONOMY 

domain  a  kind  of  natural  selection  like  that  prevailing  in  the 
organic  world. 

(3)  It  causes  a  gradual  lowering  of  prices  and  tends  to 
cheapen  goods  in  the  interest  of  all   persons,  —  particularly 
that  of  the  poorer  classes. 

(4)  It  effects  a  progressive  equalization  of  economic  conditions 
by  reducing  profits  and  wages  to  nearly  the  same  level  in  all 
industries. 

Economists  of  the  optimistic  school,  such  as  Bastiat, 
delight  in  singing  the  praises  of  the  "harmonies"  evolved 
by  free  competition,  which  they  regard  as  no  less  marvellous 
than  the  harmony  Pythagoras  believed  he  heard  descending 
from  the  skies.  They  regard  the  economic  order  based  on 
free  competition  as  "spontaneous"  or  "natural,"  and  con- 
clude that  it  is  both  perfect  and  permanent  in  character. 

This  enthusiasm  has  been  considerably  dampened  in  re- 
cent years.  A  more  attentive  observation  of  facts  and  of 
the  actual  effects  of  free  competition  has  not  justified  the 
blind  faith  in  it.  We  have  learned  that  the  present  eco- 
nomic organization  is  no  more  and  no  less  natural  and  spon- 
taneous than  any  preceding  economic  system,  such  as  the 
family  economy,  the  caste  system,  or  the  guild  system  ;  for 
these  forms  too  were  the  natural  result  of  historical  evolu- 
tion. And  as  for  the  beneficent  effects  of  competition,  it 
must  be  confessed  that  they  too  are  somewhat  questionable, 
in  view  of  certain  facts  that  stare  us  in  the  face  :  — 

(1)  Free  competition  does  not  regularly  assure  the  equi- 
librium  between   production  and  consumption  ;    there   are 
even  times  when  it  threatens  to  disturb  this  equilibrium. 
(Consult  the  preceding  section  on  Overproduction.) 

(2)  Although  free  competition  generally  stimulates  pro- 
duction by  keeping  up  a  rivalry  among  producers,  it  is  in 
other  respects  (for  example,  with  regard  to  the  quality  of 
goods)  harmful  to  production.     Each  competitor,  in  order 
to  triumph  over  his   rivals,   endeavors  to  substitute  cheap 
materials  for  better  and  more  costly  ones,  so  that  as  far  as 


FREE   COMPETITION  153 

progress  in  production  is  concerned  the  most  striking  result 
of  keen  competition  is,  perhaps,  the  adulteration  of  goods. 
Adulteration  has  now  become  a  veritable  art  that  takes  full 
and  immediate  advantage  of  all  scientific  discoveries.1 

The  monopolist,  on  the  other  hand,  generally  finds  it  to 
his  advantage  to  sustain  the  superior  quality  of  his  products; 
he  even  takes  pride  in  keeping  his  goods  up  to  a  high  stand- 
ard, in  order  to  increase  the  reputation  of  his  firm. 

(3)  Free  competition  does  not  always  guarantee  cheapness, 
and  in  many  cases  may  even  cause  high  prices.  It  is  true  that 
competition,  wherever  it  operates  thoroughly,  tends  to  bring 
the  value  of  all  goods  down  to  the  cost  of  production.  But 
there  are  many  instances  in  which  it  raises  the  cost  of  produc- 
tion, and  consequently  the  price  of  the  product.  This  para- 
doxical result  is  attained  whenever  there  is  too  large  a 
number  of  producers  in  any  branch  of  industry.  The  case 
of  bakeries  offers  a  striking  example.  The  number  of 
baker-shops  is  ridiculously  excessive.  As  each  of  them 
sells  less  and  less,  because  of  the  competition  amon'g  a  large 
and  increasing  number  of  shops,  each  is  obliged,  in  order  to 
cover  expenses,  to  charge  more  for  each  article  sold.  A 
newly  arriving  competitor  cannot  lower  prices,  as  they  are 
just  high  enough  to  permit  the  old  producers  to  gain  a 
livelihood  ;  his  entrance,  on  the  contrary,  will  raise  prices, 
since  still  another  producer  must  be  supported  by  the  same 
quantity  of  sales.2 

1  Instances  of  this  state  of  affairs  are  innumerable.     Wine  can  now  be 
made  without  grapes,  jam  and  preserves  without  fruit  and  without  sugar, 
butter  without  milk,  and  eggs  without  hens.     At  Lyons,  France,  silk  goods 
are  made  that  contain  only  5  per  cent  of  silk  and  95  per  cent  of  mineral 
substances. 

If  competition,  or,  in  general,  the  struggle  for  life,  guaranteed  the  triumph 
of  the  most  moral,  the  most  devoted,  and  the  most  unselfish  persons,  then 
it  would  truly  be  a  means  of  progress  and  real  selection.  But  in  reality  it 
only  assures  the  victory  of  the  strongest  and  most  cunning,  and  thus  may 
entail  a  veritable  moral  retrogression,  for  men  are  obliged,  as  the  proverb 
says,  to  "howl  with  the  wolves." 

2  Formerly,  the  number  of  bakers  was  regulated  in  each  city  according  to 


154  PRINCIPLES    OF    POLITICAL    ECONOMY 

On  the  other  hand,  the  system  of  monopoly  does  not  mean 
the  arbitrary  rule  of  the  monopolist.  Prices  are,  under  this 
system,  no  more  arbitrary  than  under  that  of  free  competi- 
tion ;  for  in  both  cases  prices  are  subject  to  the  general  law 
of  values,  the  price  of  an  object  always  being  limited  by  the 
desire  of  consumers  for  that  object  and  the  sacrifices  they 
are  ready  to  make  to  procure  it.  Without  entering  into  the 
difficult  question  of  the  determination  of  prices  under  a 
system  of  monopoly,  we  may  remark  that  every  monopolist 
finds  it  to  his  interest  to  keep  prices  reasonably  low,  on  the 
principle  of  "small  profits  and  large  sales."1 

(4)  Free  competition  does  not  necessarily  cause  an  equali- 
zation of  profits  and  of  wealth  ;  for  competition  is  essentially 
a  kind  of  warfare  which  means  the  triumph  of  the  strong  and 
the  ruin  of  the  weak.  Can  it  be  said  that  political  wars  have 
resulted  in  equalizing  the  political  power  of  nations,  or  that 
vital  competition  —  known  as  the  "  struggle  for  life "  — 
among  plants  and  animals  has  developed  all  of  them  to  the 
same  degree  ?  Similarly,  those  countries  in  which  industrial 
competition  is  most  free  and  most  vigorous,  e.g.  the  United 
States,  are  those  in  which  the  most  colossal  fortunes  are  found. 

population,  and  bread  was  relatively  less  dear  than  to-day.  In  Paris  thirty 
years  ago  there  was  one  baker  to  every  1800  inhabitants  ;  to-day  there  is  one 
for  every  1300,  and  if  we  count  the  branch  stores,  one  for  every  800.  In 
order  to  earn  a  living  they  must  make  a  profit  of  one  cent  per  pound  of 
bread ;  this  is  the  amount  indicated  by  the  official  price  lists.  The  great 
cooperative  bakeries  can  cover  their  expenses  with  one-fourth  this  gain. 

No  one  has  denounced  the  evil  effects  of  free  competition,  or  the  paradoxi- 
cal result  that  it  has  in  raising  prices,  with  more  animation  than  Fourier. 
But  even  John  Stuart  Mill,  whose  energetic  statement  in  favor  of  free  com- 
petition we  have  quoted,  also  recognized  (in  a  declaration  made  before  a 
commission  of  the  House  of  Commons,  June  6,  1850)  that  the  middlemen 
obtain  an  extravagant  part  of  the  total  produce  of  social  labor,  and  that 
"  competition  has  no  other  effect  than  to  share  the  sum  total  among  a  larger 
number  and  thus  diminish  the  portion  of  each,  rather  than  to  lower  the 
relative  part  obtained  by  this  class  in  general." 

1  The  formation  of  trusts  in  this  country  has  in  some  cases  raised  prices  ; 
but  in  the  best-managed  monopolies,  prices  are  probably  no  higher  than  they 
would  be  under  competition.  See  Jenks,  "The  Trust  Problem,"  pp.  130-170. 


FREE    COMPETITION  155 

(5)  Lastly,  the  most  unexpected  result  of  free  competition 
is  that  it  is  not  a  permanent  state,  as  experience  shows  that 
it  tends  to  destroy  itself  by  giving  rise  to  monopolies  !  Be- 
cause of  the  gradual  elimination  of  smaller  enterprises  and 
the  triumph  of  the  large  ones,  competition  tends  to  cause  the 
formation  of  giant  enterprises  that  seek  to  suppress,  and  that 
actually  succeed  in  suppressing,  all  competition.  The  great 
capitalistic  leaders  in  each  branch  of  production  endeavor  to 
form  gigantic  combinations,  of  national  or  even  international 
importance,  called  "trusts"  in  this  country  and  "Kartellen" 
in  Germany.  These  combinations  despotically  control  an 
entire  branch  of  production,  at  least  for  a  time,  and  become, 
so  to  speak,  states  within  the  state.  They  arouse  the  distrust 
of  governments,  which  consequently  intervene  by  means  of 
regulatory  laws  or  taxes,  and  which,  in  some  cases,  take 
charge  of  these  enterprises  themselves  and  thus  transform 
private  monopolies  into  public  ones. 

The  economic  evolution  which  is  taking  place  at  the 
present  time  appears  to  involve  these  three  successive 
stages  :  (a)  competition  among  small  producers  ;  (b)  the 
monopoly  control  of  large  producers  ;  (<?)  regulation  by  law. 
This  development,  which  would  lead  straight  to  collectivism, 
or  at  least  to  state  socialism,  is  fortunately  not  inevitable. 
We  can  very  well  conceive,  and  we  are  already  beginning  to 
realize,  a  system  in  which  mutual  agreement  —  between 
workmen  and  employers  through  the  medium  of  organizations 
of  both,  and  between  producers  and  consumers  by  means  of 
cooperative  associations  —  will  do  away  with  most  of  the  evils 
of  competition  without  placing  free  enterprise  under  the  yoke 
of  governmental  regulation.1 

1  Aside  from  economic  arguments  there  are  also  moral  and  philosophical 
considerations  which  lead  us  to  the  belief  that  cooperation  is  destined  more 
and  more  to  take  the  place  of  competition.  Even  in  biology  there  is  a  new 
school  that  inclines  to  the  belief  that  association  may  be  a  cause  of  progress 
and  improvement  of  the  species  quite  as  powerful  as  the  competition  empha- 
sized by  Darwin  and  Spencer.  Consult  Geddes,  "  The  Evolution  of  Sex." 


CHAPTER   II  — ASSOCIATION 
I.  The  Successive  Forms  of  Association 

"  TO-DAY,  Good  Friday,"  wrote  Fourier  in  1818,  "  I  have 
discovered  the  secret  of  universal  association."  This  was  a 
boast,  for  Fourier,  although  he  set  forth  the  principle  of 
association  with  remarkable  vigor,  certainly  did  not  discover 
it.  Association  is  not  the  kind  of  phenomenon  that  requires 
discovery  ;  it  is  perfectly  patent  to  everybody.  It  is  prob- 
ably the  most  general  of  all  the  laws  that  govern  the  universe, 
since  it  is  manifested  not  only  in  the  relations  among  men 
living  in  society,  but  also  in  those  that  govern  the  planets  of 
the  solar  system,  those  that  unite  the  molecules  of  inorganic 
matter  and  the  cells  of  organisms,  as  well  as  those  that  rule 
human  thought.  Even  the  lower  animals  are  familiar  with 
the  laws  of  association,  and  some  animal  "  societies,"  —  those 
of  the  bees,  ants,  and  beavers,  —  have  long  been  an  inex- 
haustible topic  of  study  and  admiration. 

Association  is  absolutely  necessary  for  every  enterprise 
that  is  too  great  for  a  single  person,  even  though  it  be  the 
mere  lifting  of  a  weight.  The  word  association  to-day 
almost  inevitably  suggests  the  thought  of  voluntary  grouping. 
But  this  is  a  mistake.  Association  among  men  was  first 
the  result  of  instinct  (as  among  animals),  then  of  coercion, 
and  only  recently,  at  least  in  the  economic  domain,  has  it 
become  the  result  of  contract.  Even  now  it  is  not  entirely 
contractual. 

The  most  natural  and  probably  the  very  first  form  of 
association  was  the  union  of  sexes  and  the  family  which 
resulted  from  it.  It  may  be  objected  that  this  association 
has  no  economic  character.  That  would  be  an  error,  for  it 

156 


THE   FORMS   OF   ASSOCIATION  157 

appears  that  marriage,  or  rather  the  household,  was  at  the 
outset  an  association  of  distinctively  economic  character. 
If  we  should  ask  an  American  Indian  why  he  gets  married, 
he  would  reply,  "  Because  our  wives  go  after  wood,  water, 
and  food,  and  carry  all  our  baggage."  It  is  even  very  prob- 
able that  the  economic  aspect  of  marriage  gave  it  the  perma- 
nent character  which  sexual  instinct  or  even  parental  instinct 
would  have  been  powerless  to  impart.  The  clan,  and  all 
forms  of  primitive  political  and  economic  association  the 
origin  of  which  is  still  clouded  in  mystery,  probably  origi- 
nated in  some  kind  of  blood-relationship. 

Association  next  became  coercitive,  in  the  form  of  slavery. 
We  have  already  said  that  slavery  must  be  considered  simply 
as  a  widening  of  the  primitive  family,  due  to  economic 
causes,  chief  among  which  was  probably  the  need  of  a  more 
powerful  association.  At  a  time  when  wives  were  won  by 
conquest  and  capture  (as  in  the  traditional  rape  of  the 
Sabines),  there  is  nothing  surprising  in  the  fact  that  conquest 
should  serve  also  to  annex  alien  workers  to  the  family.  Or- 
dinarily, captured  members  of  foreign  tribes  finally  became 
adopted  members  of  the  family,  as  one  may  readily  observe 
in  the  Greek  tragedies  of  2500  years  ago,  or  in  the  accounts 
of  travellers  who  have  visited  modern  Morocco. 

It  was  by  means  of  this  enforced  cooperation  that  the 
ancients  were  enabled  to  erect  the  Cyclopean  walls  and  the 
Egyptian  pyramids,  and  to  propel  galleys  having  three  or 
four  banks  of  oars. 

Association  gradually  became  semi-coercive  even  among 
savages.  During  the  Middle  Ages  it  adopted  innumerable 
and  complex  forms,  which  we  cannot  pause  to  describe  now. 
Finally,  it  was  transformed  into  association  under  the  leader- 
ship of  employers.  In  all  modern  societies,  production  is  car- 
ried on  by  private  enterprises,  using  this  term  in  its  technical 
sense  to  signify  groups  of  persons  in  which  one  individual 
—  the  employer  —  furnishes  capital,  tools,  and  land,  while 
the  others  —  who  are  hired  for  wages  —  provide  the  labor. 


158  PRINCIPLES    OF   POLITICAL    ECONOMY 

Is  this  form  the  last,  is  contractual  association  the  termi- 
nating-point  of  social  evolution,  and,  aside  from  some  minor 
details  which  perhaps  require  improvement,  the  permanent 
form  of  productive  organization  ?  Such  is,  indeed,  the  opin- 
ion of  the  classical  school.  But  we  must  deny  that  the  pres- 
ent form  of  association  is  founded  on  free  contract.  The 
laborers  who  work  in  the  factory  are,  to  be  sure,  free  men,  — 
free  to  come  and  to  go  at  their  own  choice  ;  yet  it  is  true  that 
we  have  here  only  an  imperfect  form  of  free  association,  and 
the  most  conclusive  proof  of  this  lies  in  the  fact  that  neither 
in  law  nor  in  everyday  speech  do  we  use  the  word  "  asso- 
ciation "  when  speaking  of  the  union  of  employers  and 
employees.  Perhaps  our  application  of  the  term  to  this 
relation  has  already  surprised  the  reader.  The  union  of 
employer  and  employees  is,  however,  an  association  in  fact, 
but  not  in  law  ;  it  is  an  association  in  production,  but  not  in 
distribution.  The  workers  have  no  feeling  whatever  of  being 
"  associated  "  with  the  employer  in  a  common  undertaking. 
This  is,  as  we  shall  see,  precisely  the  gravest  defect  of  the 
wage  system.  (See  the  section  on  the  Wage  System.) 

But  legislation  now  tends  to  give  the  wage  system  the 
character  of  a  real  contract,  —  when,  for  example,  it  calls  upon 
the  workmen  to  participate  in  the  preparation  of  "  workshop 
regulations,"  or  when  it  awards  damages  for  breaking  the 
contract  of  hire.  Employers  and  workers  also  tend  toward 
this  conception  by  founding  organizations  and  institutions 
that  we  shall  describe  further  on.  (See  Book  V.)  We  there- 
fore have  the  right  and  the  duty  to  hope  that  association 
under  the  leadership  of  employers  will  in  turn  give  way  to 
more  thorough  and  complete  association,  i.e.  free  and  real 
association,  that  shall  include  distribution  as  well  as  produc- 
tion, and  in  which  each  party  shall  have  not  only  a  clear  con- 
sciousness that  he  is  a  member  of  a  collective  undertaking, 
but  also  the  firm  resolution  to  work  in  harmony  with  the 
other  members.  It  is  for  this  reason  that  the  concerns  in 
which  true  or  contractual  association  is  practised  between 


THE    ASSOCIATION    OF    CAPITAL  159 

capital  and  labor  —  although  thus  far  they  occupy  only  a 
microscopically  small  place  in  our  economic  system  —  should 
be  regarded  as  representing  the  superior  phase  toward  which 
social  evolution  is  moving. 

II.  The  Association  of  Capital 

From  what  we  have  said,  it  follows  that  the  truly  free  asso- 
ciation of  laborers  has  scarcely  yet  been  tried.  The  same 
statement  cannot  be  made  with  regard  to  the  association  of 
capital.  When  businesses  are  conducted  on  a  large  scale, 
—  and  we  shall  see  in  the  next  section  that  such  is  the  present 
tendency,  —  one  man  cannot  usually  furnish  all  the  capital 
that  is  required,  or  even  the  capital  that  is  needed  to  em- 
ploy the  requisite  number  of  laborers.  For  this  reason  sev- 
eral capitalists  unite  in  order  to  furnish  the  necessary  capital, 
and  the  enterprise  is  launched  in  the  form  of  a  so-called 
"  stock  company,"  —  a  new  form  of  business  that  is  rapidly 
gaining  ground  in  commerce  and  industry.1 

A  stock  company  offers  great  advantages,  precisely  be- 
cause it  is  exclusively  an  association  of  capital.  Of  the  three 
instruments  of  production,  —  land,  labor,  and  capital,  —  the 
last  most  readily  admits  of  association,  because  it  possesses 
certain  characteristics  to  a  far  greater  degree  than  either  land 
or  labor,  namely  divisibility  and  the  facility  with  which  it  is 
moved  from  one  place  to  another. 

There  is  no  natural  limit  to  the  divisibility  of  capital ; 
hence  each  capitalist  may  restrict  his  share  in  a  business 
enterprise  and  limit  his  risks  as  best  suits  him.  This  feature 
explains  the  success  of  stock  companies.  When  each  share 
costs  only  $100  (or  in  some  associations  only  $5),  each  person 

1  The  important  and  predominating  position  of  the  corporation  in  Ameri- 
can manufactures  at  the  present  time  is  revealed  by  the  census  statistics  for 
manufactures.  While  only  40,743  of  the  512,254  establishments  reporting  in 
1900  were  organized  into  corporations,  they  nevertheless  produced  $7,733,- 
582.531,  or  59.5  per  cent  of  the  total  gross  value  of  products.  These  organiza- 
tions comprise  nearly  all  the  great  manufacturing  enterprises  of  the  country. 


160  PRINCIPLES    OF    POLITICAL   ECONOMY 

may  buy  exactly  according  to  his  wealth  or  his  degree  of 
confidence'  in  the  enterprise.1 

Moreover,  the  marvellous  facility  with  which  capital  is 
transported  is  increased  every  day  by  the  development  of 
credit  institutions  and  devices.  Laborers,  as  well  as  land- 
owners, in  their  efforts  to  cooperate  productively,  are  obliged 
to  choose  a  certain  locality,  and  can  bring  together  only  those 
persons  that  live  in  a  particular  part  of  the  country.  Labor 
is  not  easily  moved  from  one  place  to  another  ;  land  cannot 
be  moved  at  all.  But  capital  has  wings,  so  to  speak,  and  can 
fly  from  the  most  distant  parts  of  the  earth  to  such  places  as 
offer  the  most  profitable  investment. 

But,  on  the  other  hand,  this  form  of  association  involves 
such  grave  disadvantages  that  we  can  hardly  agree  with 
those  economists  who  regard  it  as  the  coming  form  of  busi- 
ness enterprise.  The  very  fact  that  it  associates  only  capital 
and  not  persons  is  a  sign  of  inferiority.  The  associates, 
called  stock-holders,  do  not  know  each  other,  and  often  have 
no  further  knowledge  of  the  enterprise  than  that  given  in 
the  share  certificates  stored  in  their  safes.2  A  stock  company 
consists  of  two  groups  of  persons  :  on  the  one  hand  those 
who  share  the  profits  of  an  enterprise  in  which  they  do  not 
work,  and  on  the  other  hand  those  who  work  in  an  enter- 

1  Industrial  associations  offer  the  capitalist  the  choice  of  receiving  a  fixed 
income  or  of  sharing  the  risks  of  an  enterprise  ;  they  offer  him  either  bonds 
giving  the  right  to  the  regular  receipt  of  a  fixed  sum,  or  stock  that  represents 
shares  of  property  and  confers  the  right  to  a  proportionate  share  in  the 
risks  and  profits  of  the  business. 

The  divisibility  of  capital  furthermore  permits  capitalists  to  undertake  co- 
lossal and  very  hazardous  enterprises  that  otherwise  would  be  impossible. 
No  capitalist,  however  wealthy  he  may  be,  dares  to  provide  the  millions  nec- 
essary for  building  an  Isthmian  Canal.  The  risk  is  too  great.  But  there  are 
many  capitalists  who  are  each  willing  to  incur  a  small  part  of  the  risk  ;  and 
when  the  risk  is  thus  distributed,  the  failure  of  the  project  can  entail  the  ruin 
of  only  those  few  who  have  risked  large  amounts. 

2  Many  capitalists  who  try  hard  to  get  hold  of  the  mining  stock  of  Witt- 
wateisrand,  Klondike,  or  Sosnowice,  would  be  embarrassed  to  locate  these 
places  on  the  map.     Assuredly,  the  bond  of  association  which  unites  them 
to  the  men  that  work  in  these  mines  is  of  a  rather  fictitious  nature. 


LARGE-SCALE   PRODUCTION  161 

prise  the  profits  of  which  they  do  not  share.  This  situation 
is  hardly  compatible  with  our  idea  of  justice,  and,  even  from 
the  economic  point  of  view,  involves  a  singularly  unstable 
state  of  affairs.  (See  Book  V,  on  Distribution.) 

III.   Large-scale  Production 

The  organization  of  production  under  the  control  of  em- 
ployers, and  particularly  by  means  of  the  association  of  capi- 
tal, is  both  the  evidence  and  the  indispensable  condition 
of  the  most  characteristic  change  of  modern  times,  viz.,  the 
passage  from  production  on  a  small  scale  to  production  on  a 
large  scale.1 

In  the  closing  years  of  the  nineteenth  century  this  kind  of 
organization  has  taken  such  enormous  dimensions  as  to 
attract  public  attention  and  arouse  public  anxiety.  Manu- 
facturing syndicates  tend  to  obtain  control  of  an  entire 
branch  of  industry  in  a  country  and  even  in  the  whole  world. 
In  the  United  States,  where  they  have  developed  most  re- 
markably, they  are  generally  called  trusts,  and  the  same 
name  has  been  adopted  elsewhere.  We  hear  of  them  con- 
stantly. Scarcely  a  day  passes  but  the  newspapers  announce 
the  formation  of  a  new  one.  There  is  the  oil  trust  (re- 
garded as  the  first),  the  coal  trust,  the  steel  trust  (with  a 
capital  supposed  to  reach  11,500,000,000),  the  coal  trust,  the 
tobacco  trust,  the  whiskey  trust,  the  writing-paper  trust,  the 
copper  trust,  and  very  many  more.2  Even  governments 
have  been  alarmed  at  their  power  and  increase,  and  have 

1  The  Baldwin  Locomotive  Works,  of  Philadelphia,  employ  13,500  per- 
sons, and  build  from  30  to  35  locomotives  per  week,  or  one  locomotive  every 
four  hours.    The  Krupp  steel  works  at  Essen  employ  over  20,000  workers. 
The  United  States  Steel  Corporation  has  158,000  employees,  according  to 
Professor  H.  L.  Nelson,  in  his  article  on  "  The  So-called  Steel  Trust,"  in 
the  Century  Magazine  for  December,  1902.      There  are  hundreds  of  enter- 
prises,—  factories,    railroads,  electric  traction   companies,    etc., — each   of 
which  employs  several  thousand  workers.     Some  of  our  railroads  have  over 
30,000  employees. 

2  English  newspapers  report  the  existence  of  a  "Bible  Trust,"  some  prin- 


162  PRINCIPLES    OF   POLITICAL    ECONOMY 

adopted  legislative  measures  to  curb  them,  —  measures 
which  generally  have  proved  ineffective. 

Yet  the  trusts  have  found  defenders.  Many  persons  re- 
gard them  as  the  preliminary  steps  toward  a  new  industrial 
regime  which  will  put  an  end  to  present  ill-regulated  pro- 
duction, by  establishing  a  proper  equilibrium  between  pro- 
duction and  consumption  ;  this  will  result,  they  maintain,  not 
so  much  in  the  rise  of  prices  as  in  assuring  the  regularity  of 
profits  and  wages.  At  all  events,  trusts  seem  to  be  success- 
ful in  preventing  those  crises  of  overproduction  to  which 
we  have  referred.1 

cipal  book  dealers  having  formed  a  syndicate  to  raise  the  price  of  Holy  Scrip- 
ture 15  per  cent. 

In  a  list  of  trusts  and  combinations  in  this  country,  given  by  Byron  W. 
Holt  in  the  Review  of  Reviews  for  June,  1899,  there  are  about  one  hundred 
and  twenty  corporations  of  this  kind,  each  having  a  capital  of  ten  millions  or 
more.  About  one-half  of  these  were  formed  in  1899. 

The  Journal  of  Commerce,  in  its  year-book  for  1899,  published  a  list  of 
353  trusts  and  combinations  existing  in  March  of  that  year,  with  an  average 
capitalization  of  $17,000,000  and  a  total  capitalization  of  §5,832,882,842. 

Moody's  Manual  of  Corporation  Securities  for  1902,  an  accepted  author- 
ity in  financial  circles,  gives  a  list  of  consolidations  or  trusts,  with  a  capital 
of  $10,000,000  and  over,  which  have  been  formed  since  January  1,  1899. 
This  list  contains  82  companies,  with  a  total  capital  of  $4,318,005,646.  The 
same  authority  may  be  quoted  to  the  effect  that  "  a  complete  list,  without 
regard  to  date  of  formation  and  including  both  large  and  small,  would  prob- 
ably aggregate  850  going  combinations,  and  would  easily  foot  up  over 
$9,000,000,000  of  capitalization.  Including  railroad  consolidations,  such  a 
list  would  make  a  total  of  over  $15,000,000,000  outstanding  capitalization." 

1  A  trust,  as  popularly  understood,  is  a  consolidation,  combine,  pool,  or 
agreement  of  two  or  more  naturally  competing  concerns,  with  the  purpose  of 
fixing  prices  or  rates  in  any  industry  or  group  of  industries.  Generally,  the 
trust  endeavors  to  regulate  the  price  and  the  quantity  of  the  output.  The 
customary  form  now  is  that  of  corporate  consolidation,  in  which  competing 
producers  give  up  their  autonomy  and  transfer  the  ownership  of  their  plants 
in  exchange  for  shares  of  stock  in  the  consolidation. 

Trust  literature,  which  is  quite  extensive,  includes  a  number  of  inter- 
esting books,  among  which  mention  should  be  made  of  the  following :  W.  M. 
Collier,  "The  Trusts,"  New  York,  1900;  von  Halle,  "Trusts  or  Industrial 
Combinations  in  the  United  States,"  New  York,  1895;  Jeans,  "Trusts, 
Pools,  and  Corners,"  London,  1894;  Jenks,  "The  Trust  Problem,"  New 
York,  1900;  George  Gunton,  "Trusts  and  the  Public,"  New  York.  1899; 


LARGE-SCALE   PRODUCTION  163 

Now  the  evolution  which  is  taking  place  round  about  us 
is  not  merely  the  result  of  a  kind  of  fatality ;  it  is  due  to 
the  fact  that  it  offers,  from  the  viewpoint  of  production, 
certain  incontestable  advantages.  What  are  these  advan- 
tages ?  .  First  of  all,  only  large-scale  production  permits  of 
certain  undertakings  which,  because  either  of  their  size  or  of 
the  time  they  require,  far  exceed  the  power  and  the  lifetime 
of  an  individual. 

Even  in  those  enterprises,  moreover,  which  would  not 
actually  overtax  the  capacity  of  an  individual,  collective 
production  possesses  a  marked  superiority.  By  grouping 
all  the  factors  of  production,  —  manual  labor,  capital,  natural 
agents,  and  situation,  —  it  economizes  them  ;  that  is  to  say, 
the  same  amount  of  wealth  is  produced  at  a  less  cost,  or, 
what  amounts  to  the  same  thing,  more  wealth  is  produced 
at  the  same  cost.  The  various  economies  of  large-scale  pro- 
duction are  entitled  to  separate  consideration  :  — 

(1)  Economy  of  labor.  This  advantage  is  due  above  all 
to  the  possibility  of  introducing  a  more  perfect  division  of 
labor,  as  we  shall  see  presently.  But  it  is  also  a  result  of 
simply  bringing  the  laborers  together.  In  small-scale  pro- 
duction much  time  is  lost,  and  some  of  the  workers  are 
obliged  to  be  frequently  unoccupied.  Take  for  instance  a 
hundred  business  houses,  each  of  which  employs  ten  men, 
and  merge  them  into  one  large  establishment.  It  is  evident 
that  in  order  to  do  the  same  amount  of  work  as  was  done 
before,  it  will  not  be  necessary  to  retain  all  the  employees. 
There  will  be  no  need  for  a  hundred  cashiers  or  a  hundred 
bookkeepers.  As  each  employee  will  now  be  able  to  work 
continuously,  he  will  be  able  to  do  two  or  three  times  as 

and  especially  the  Report  of   the  United  States  Industrial  Commission, 
Volumes  2,  13,  and  18. 

Interesting  descriptive  articles  on  the  principal  American  trusts  are  pub- 
lished in  the  Century  Magazine,  beginning  with  the  number  for  November, 
1902.  An  illustrated  history  of  the  Standard  Oil  Company,  by  Ida  M.  Tar- 
bell,  was  begun  in  the  November  number,  1902,  ofMcClure's  Magazine,  and 
continued  through  several  subsequent  numbers. 


164  PKINCIPLES    OF   POLITICAL   ECONOMY 

much  work,  and  consequently  will  take  the  place  of  two  or 
three  men  working  under  the  old  system. 

(2)  Economy  of  place.       To  obtain  a  hundred  times  more 
room  in  a  store  or  factory,  it  is  not  necessary  to  have  a  piece 
of  ground  a  hundred  times  as  large,  nor  to  purchase  a  hun- 
dred times  the  amount  of  building  material.     Simple  mathe- 
matics shows  that  when  the  volumes  of  two  cubes  are  as  1  to 
1000,  their  surfaces  are  as  1  to  100  ;  and  it  is  the  surface 
that  costs  most.      Everyday  experience,  moreover,  demon- 
strates that  the  cost  of  a  building  or  the  rent  of  a  store  does 
not  increase  in  direct  proportion  to  the  surface  occupied. 
The  smallest  stores  on  the  business  streets  of  our  large  cities 
pay  a  comparatively  high  rental ;  but  the  large  "  department 
stores,"  many  of  which  transact  a  hundred  times  as  much 
business  as  the  average  small  store,  certainly  do  not  pay  a 
hundred  times  as  much  rent.1 

(3)  Economy  in  natural  agents.      A  powerful  steam-engine 
consumes,  relatively  speaking,  far  less  coal  than  a  weak  one.2 
Electric  lighting  is  more  economical  than  gas  illumination 
when  used  for  a  large  area,  but  it  is  exceedingly  dear  when 
used  on  a  small  scale. 

(4)  Economy  of  capital.      Take  a  large  store  transacting  a 
hundred  times  the  business  done  by  a  small  one.     It  does 

1  The  greatest  department  store  in  Paris  evaluates  its  rental  at  $200,000  a 
year,  and  transacts  business  to  the  amount  of   $30,000,000.      Stores  that 
transact  business  to  the  amount  of  $30,000  a  year  certainly  pay  more  than 
a  proportionate  sum  —  $200  —  annually  for  rent. 

The  business  of  several  American  department  stores  amounts  annually  to 
from  $7,500,000  to  $15,000,000.  The  mail-order  business  of  one  great  store 
amounts  to  §900,000  a  year.  On  the  busiest  days  fully  one  hundred  thousand 
persons  visit  each  of  the  largest  stores  in  New  York,  Philadelphia,  Chicago, 
and  Brooklyn.  One  firm  spends  more  than  $300,000  a  year  for  advertising. 
Single  departments  in  several  stores  sell  more  than  $2,000,000  worth  of  goods 
annually.  Consult  the  interesting  article  by  S.  H.  Adams  on  "  The  Depart- 
ment Store  "  in  &cribner'ls  Magazine  for  January,  1897. 

2  M.  Achard,  in  an  article  in  the  Revue  d'economie  politique  for   Sep- 
tember, 1890,  calculates  that  one  horse-power  will  cost  eight  cents  when  pro- 
duced by 'a  five  horse-power  engine,  five  and  one-half  cents  when  produced 
by  a  ten  horse-power  engine,  two  cents  when  a  fifty  horse-power  machine  is 


LARGE-SCALE   PRODUCTION    '  165 

not  need  to  keep  on  hand  a  hundred  times  the  goods  kept 
in  stock  by  the  small  store  ;  probably  ten  times  the  amount 
is  sufficient,  except  that  it  must  be  renewed  ten  times  as 
often  as  in  the  small  store.  The  large  store,  therefore,  can 
do  a  hundred  times  as  much  business  with  only  ten  times 
as  much  capital.  The  consumer,  moreover,  is  better  satisfied, 
for  in  consequence  of  this  frequent  renewal  of  stock,  the 
goods  are  newer  and  more  fashionable. 

Again,  merchants  or  manufacturers  who  buy  on  a  large 
scale  can  secure  better  bargains  ;  they  obtain  greater  dis- 
counts and  are  better  able  to  pay  in  cash,  or,  at  least,  do  not 
require  long  credits  before  they  can  pay  bills^1  Hence  the 
large  stores  or  manufacturers  that  buy  in  large  quantities 
make  more  effective  use  of  their  capital.2 

used,  and  only  one  cent  when  produced  by  engines  of  above  one  hundred 
horse-power  capacity. 

1  Small  stores,  which  require  considerable  time  to  dispose  of  their  stock, 
necessarily  have  a  much  larger  share  of  their  capital  "  tied  up."     A  typical 
example  of  the  disadvantage  of  the  small  store  is  offered  by  the  sale  of  cheap 
non-copyrighted  books ;  the  small  store  can  afford  to  buy  them  only  in  small 
quantities  of  a  few  hundred  at  a  time,  whereas  the  larger  establishments, 
purchasing  entire  editions  of  ten  or  twenty  thousand,  can  often  sell  them  at  a 
lower  price  per  volume  than  that  paid  by  the  small  dealer  himself. 

The  capital  stock  of  the  greatest  Paris  department  store  is  but  $4,000,000, 
and  the  annual  dividend  averages  $1,500,000,  that  is,  about  40  per  cent 
on  the  capital,  and  about  5  per  cent  on  the  total  sales.  It  is  no  infrequent 
occurrence  for  the  entire  stock  of  a  department  to  be  sold  out  and  replen- 
ished twelve  times  in  a  year. 

Concerning  the  better  paying  facilities  of  great  businesses,  a  man  who 
conducted  one  of  them  is  quoted  to  the  effect  that  "the  profits  of  the  de- 
partment store  are  represented  by  the  cash  discounts  on  its  bills." 

An  interesting  series  of  articles  describing  the  most  typical  of  American 
great  businesses  is  given  in  Scribner's  Magazine  for  1897. 

2  Besides    the  advantages   of    large-scale    production  here  enumerated, 
economists  have  pointed  out  the  following :  — 

1.  Large  concerns  can  more  easily  experiment  with  new  methods,  and  with 
new  machinery  which  is  sometimes  too  expensive  for  a  small  establishment. 

2.  They  can  best  utilize  a  multitude  of  by-products.    In  refining  petro- 
leum, for  instance,  material  which  was  formerly  wasted  is  now  utilized  for  the 
production  of  lubricating  oil,  naphtha,  and  paraffine. 

3.  They  can  effect  large  savings  by  carrying  on  allied  or  subsidiary  pro- 


166  PRINCIPLES    OF   POLITICAL    ECONOMY 


IV.  Is  the  Tendency  toward  Large-scale  Production  Inevitable 
and  Desirable  ? 

If  the  evolution  which  we  have  just  studied  should  con- 
tinue in  the  future,  it  would  involve  the  gradual  disappear- 
ance, from  the  economic  field,  of  all  those  persons  who  work 
under  their  own  guidance,  —  small  artisans,  small  shop- 
keepers, small  landholders,  and  all  other  autonomous  pro- 
ducers. These  persons,  now  economically  their  own  masters, 
would  become  employees,  i.e.  wage-earners,  working  for  im- 
mense enterprises  directed  by  capitalists  possessing  millions, 
or  for  stock  companies  consisting  of  persons  whose  names  are 
not  publicly  known. 

This  prospect  is  agreeable  to  many  economists  and  to  all 
collectivist  socialists.  The  latter  especially  declare  that 
this  evolution  is  inevitable,  and  ridicule  every  effort  to  put 
hindrances  in  its  way.  They  rejoice  at  every  successive 
step  by  which  small  industry  gives  way  to  large  concerns, 
and  individual  production  tends  toward  large-scale  collective 
production,  because  they  consider  these  steps  as  mile-posts 
marking  our  progress  on  the  road  that  leads  straight  to 
collectivism.1 

They  profess,  moreover,  a  sovereign  contempt  for  small 
production  and  individual  enterprises.  "  This  system,"  says 

cesses.  Large  sugar  refiners,  for  example,  import  their  own  raw  sugar,  own 
their  own  wharves  and  warehouses,  and  make  their  own  barrels  and  boxes. 

4.  They  more  readily  acquire  a  wide  reputation,  and  can  more  easily 
attract  customers  by  means  of  advertisements,  efficient  and  specialized  ser- 
vice, and  conveniences  for  customers  which  would  be  impossible  in  a  small 
business.  Some  of  the  large  department  stores  now  have  elegant  waiting- 
rooms,  bureaus  of  information,  post  offices,  and  telegraph  offices. 

1 A  vigorous  but  remarkably  fair  statement  of  the  collectivist  position  on 
this  point  is  given  by  the  Belgian  socialist,  Emile  Vandervelde,  in  a  book 
entitled,  "  Le  Collectivisme  et  P Evolution  Industrielle,"  Paris  (Bellais),  1900. 

The  tendency  toward  concentration  into  large  establishments  is  probably 
most  manifest  in  manufacturing.  Interesting  data  regarding  this  tendency 
may  be  found  in  Vol.  VII  of  the  Twelfth  Census.  On  page  cccxvii  the  state- 
ment is  made  that  the  total  number  of  manufacturing  establishments  increased 


LARGE-SCALE    PRODUCTION  167 

Karl  Marx,  "  excludes  concentration,  cooperation  on  a  large 
scale,  the  extensive  use  of  machinery,  the  wise  rule  of  man 
over  nature,  agreement  and  unity  in  the  purposes,  the 
means,  and  the  efforts  of  collective  activity.  It  is  compat- 
ible only  with  a  rudimentary  state  of  production  and  society. 
To  perpetuate  such  a  system  of  isolated  production  would 
be  to  decree  mediocrity  in  all  things." 

We  cannot  accept  this  sweeping  condemnation.  The  sys- 
tem of  small-scale  production,  or  rather  that  of  small  inde- 
pendent plants,  would,  we  believe,  be  conducive  of  social 
peace  and  favor  a  more  equitable  distribution  of  wealth.  Its 
simplicity  would  preclude  most  of  the  conflicts  that  now  arise 
among  the  different  classes  of  participants  in  production,  and 
especially  the  bitter  conflict  between  labor  and  capital.  It 
would  not  establish  the  rule  of  absolute  equality,  fortunately; 
but  it  would  cause  no  other  inequalities  than  those  due  to  dif- 
ferences in  the  productive  power  of  land  and  of  the  other  in- 
struments of  production,  or  inequalities  that  are  inherent  in 
all  the  actions  and  devices  of  man.  Even  from  the  productive 
point  of  view,  small  production  is  not  so  impotent  or  out  of 
date  as  it  is  supposed  to  be.  Independent  small  producers 
may  associate  and  adopt  some  of  the  processes  of  large-scale 
production,  as  well  as  a  more  extended  division  of  labor, 
without  sacrificing  their  autonomy,  their  initiative,  or  their 
personal  interest  (all  of  which  are  powerful  incentives  to 
production,  and  always  liable  to  be  somewhat  attenuated 
by  collective  enterprise). 

In  agriculture,  for  instance,  small  farms  are  not  absolutely 

101.8  per  cent  between  1880  and  1900,  while  the.  total  value  of  products 
increased  142.2  per  cent  in  the  same  interval. 

The  application  of  motive  power  has  greatly  increased  the  productivity  of 
many  establishments.  In  1890,  28.3  per  cent  of  the  manufacturing  concerns 
of  the  country  used  motive  power  ;  in  1900,  33.1  per  cent.  Still  more  strik- 
ing is  the  increase  of  average  horse-power  per  establishment :  in  1880  it 
was  39.7  ;  in  1890,  59.1  ;  in  1900,  66.7.  In  the  twenty  years  from  1880  to 
1900,  therefore,  there  was  an  increase  in  the  average  power  per  establishment 
of  twenty-seven  horse-power,  or  68  per  cent. 


168  PRINCIPLES    OF   POLITICAL   ECONOMY 

incompatible  with  association,  nor  even  with  the  introduction 
of  processes  of  large-scale  cultivation.  Small  farmers  may 
associate  with  one  another  to  apply  to  their  lands  all  the 
improved  methods  of  farming,  to  purchase  or  hire  machinery 
or  other  modern  devices  in  common,  to  buy  fertilizer,  seeds, 
and  plants  in  large  quantities,  to  transport  and  sell  their 
products  at  common  expense,  and  to  borrow  capital.  Indeed, 
all  these  things  are  already  being  done  —  on  a  small  scale, 
it  is  true,  but  with  increasing  success —  by  farmers'  syndi- 
cates, granges,  etc.1-^ 

It  must,  nevertheless,  be  conceded  that  association  among 
land-owners,  whenever,  extending  beyond  the  effort  to  do  a 
certain  amount  of  business  in  common,  it  also  undertakes  the 
common  cultivation  and  management  of  farms,  presents  very 

1  There  have  been  many  attempts  at  association  among  the  farmers  of  this 
country,  although  most  of  them  were  of  short  duration.  (See  the  articles  on 
Cooperation,  Farmers'  Alliance,  Farmers'  Movement,  and  on  Grangers  in 
the  " Encylopaedia  of  Social  Reform,"  edited  by  W.  D.  P.  Bliss.) 

In  France,  the  so-called  agricultural  syndicates  number  about  three  thou- 
sand, and  many  of  them  have  more  than  eight  thousand  members  each. 
They  have  already  introduced  important  reforms  in  the  agriculture  of  the 
country.  They  contribute  to  the  education  of  French  farmers  by  publish- 
ing numerous  journals,  by  propagating  new  processes,  and  by  establishing 
experimental  farms.  They  have  attempted  the  sale  in  common  of  some  com- 
modities, such  as  wine,  vegetables,  and  fruit,  and  even  tried  the  production  in 
common  of  some  goods  ;  the  latter  scheme  has  thus  far  succeeded  very  well 
only  in  the  manufacture  of  cheese  and  butter.  These  organizations  encour- 
age cattle-raising  by  buying  breeders  of  pure  stock.  They  have  endeavored 
to  create  banks  for  mutual  credit,  and  a  law  has  been  passed  recently  in 
France  to  facilitate  this  movement.  They  unite  to  form  powerful  federations 
and  unions  that  sometimes  cover  an  entire  farming  district  of  the  country. 

The  rapid  and  remarkable  development  of  these  associations  in  France 
has  given  rise  to  ambitious  hopes  for  the  future,  and  some  persons  regard 
them  as  the  beginning  of  a  peaceful  social  revolution  that  will  bar  the  way 
to  socialistic  revolution.  (Consult  "Rocquigny's  "  Les  Syndicats  agricoles.") 

Farmers'  associations  are  quite  as  fully  developed  in  Germany,  Denmark, 
and  Belgium.  In  Germany  the  wine-raisers  on  the  banks  of  the  Rhine  have 
carried  out  a  scheme  for  making  their  wine  in  common.  In  Denmark  the 
entire  agriculture  of  the  country  has  been  transformed  by  the  cooperative 
dairies,  which  have  succeeded  in  driving  French  butter  out  of  the  English 
market. 


LIMITS    OF    LARGE-SCALE   PRODUCTION  169 

grave  difficulties.  Indeed,  such  productive  associations  can 
be  formed  with  advantage  only  for  fa'rms  that  are  contigu- 
ous. Close  neighborhood  among  farmers  is  generally  more 
liable  to  give  rise  to  lawsuits  than  to  facilitate  association. 
The  jealousy  of  farmers  is  proverbial. 

But  among  those  that  work  in  manufactures  association 
will  perhaps  be  easier.  Cooperative  association,  —  under  the 
different  forms  of  productive  associations,  societies  for  the 
purchase  of  raw  materials  or  for  the  sale  of  finished  goods, 
or  societies  for  mutual  credit, — aided  by  the  mechanical  inven- 
tions that  are  substituting  electric  power  for  steam,  and 
enabling  us  to  transport  motive  power  from  the  place  of  its 
generation  to  the  place  of  its  application,  will  permit  numer- 
ous new  forms  of  industrial  enterprise  capable  of  resisting 
successfully  the  encroachments  of  large-scale  industry.  De- 
vices for  distributing  motive  power  place  small  producers 
nearly  on  a  plane  of  equality  with  large  concerns,  as  regards 
the  cost  of  power. 

Besides,  it  is  by  no  means  certain  that  large-scale  produc- 
tion has  no  limit.  It  is  probable,  on  the  contrary,  that  it 
cannot  go  beyond  a  certain  fixed  point.  The  growth  of 
social  organizations,  like  that  of  living  organisms,  seems  to 
be  restricted  by  nature  within  certain  bounds.  Some  de- 
partment stores,  such  as  exist  in  the  largest  cities,  appear 
already  to  have  attained  a  state  of  development  that  is  nearly 
permanent.  Perhaps  an  economic  reason  for  this  may  be 
found  in  the  fact  that,  beyond  a  certain  point,  the  general 
expenses  of  large  stores  are  proportionately  increased  rather 
than  diminished.  Thus  there  is  a  limit  to  the  size  of  busi- 
ness enterprises.1 


1  Some  authors  contend  that  the  economy  of  large-scale  production  is  often 
counterbalanced  by  nearly  equivalent  disadvantages  and  expenses,  such  as 
expensive  advertising,  the  cost  of  surveillance,  leakage,  and  wastes. 

President  John  Converse,  of  the  Baldwin  Locomotive  Works,  is  authority 
for  the  statement  that  these  works  have  reached  the  limit  of  economy 
and  efficiency  in  production ;  machinery,  space,  and  labor  are  as  fully 


170  PRINCIPLES    OF    POLITICAL    ECONOMY 

At  all  events,  evolution  toward  large  production  does  not 
proceed  with  equal  rapidity  in  all  fields  of  economic  activity. 
It  is  far  advanced  in  transportation,  a  trifle  less  so  in  manu- 
factures, still  less  in  commercial  enterprises,  while  in  agricul- 
ture it  is  scarcely  perceptible.  Certainly  it  cannot  be  said  in 
any  part  of  Europe  that  small  farming  is  giving  way  to  farm- 
ing on  a  very  large  scale.  Collectivists,  to  be  sure,  who  agree 
in  this  point  with  most  economists  of  the  classical  school,  main- 
tain that  this  is  only  an  anomaly,  an  accident,  a  simple  delay  in 
evolution,  due  to  the  routine  character  of  agriculture.  They 
point  particularly  to  the  example  of  the  United  States,  where 
agriculture  in  the  West  is  practised  on  a  large  scale,  and 
ask  :  Is  not  this  the  reason  why  American  farmers  defeat 
European  competitors  even  in  European  markets  ? 

But  the  example  of  the  United  States  proves  nothing 
against  our  thesis.  The  colossal  farms  of  this  country, 
although  they  have  the  advantage  of  producing  wheat  at  a 
low  cost,  have  the  disadvantage  of  giving  relatively  small 
crops.  Crops  of  wheat  on  the  "  bonanza "  farms  rarely 
exceed  thirteen  bushels  an  acre,  whereas  inferior  land  in 
France  yields  an  average  of  twenty  bushels.1  Extensive 
culture  is  made  possible  in  the  United  States  by  the  relative 
cheapness  of  land  and  the  sparseness  of  population.  But 
when  the  population  will  have  become  as  dense  as  that  of 
France  it  will  be  necessary  to  increase  the  crops  by  giving 

utilized  as  possible,  and  there  would  be  no  proportionate  gain  in  increas- 
ing any  of  these  productive  factors.  In  other  words,  it  would  be  more 
profitable  to  duplicate  the  plant  on  another  site  than  to  double  the  present 
equipment. 

A  summary  of  the  advantages  and  disadvantages  of  large-scale  production 
is  given  by  Bullock,  "  Introduction  to  the  Study  of  Economics,"  §§  100-103, 
and  in  Leroy-Beaulieu's  "Economic  Politique,"  Vol.  I. 

Production  on  a  small  scale,  its  present  status  and  future  prospect,  are 
discussed  from  the  standpoint  of  a  Catholic  reformer  in  Victor  Brant's  "La 
petite  Industrie  contemporaine,"  2e  Edition,  Paris,  (Lecoffre),  1902. 

1  The  census  of  1900,  Vol.  VI,  p.  29,  gives  some  interesting  data  re- 
garding this  point.  The  great  western  wheat-producing  states  employing 
large-scale  methods  of  farming  are  Minnesota,  South  Dakota,  North  Dakota, 


LIMITS    OF    LARGE-SCALE   PRODUCTION 


171 


up  the  methods  of  extensive  farming,  and  by  concentrating 
labor  and  capital  on  smaller  areas.1 

The  essential  fact  that  should  never  be  lost  sight  of  is  that 
although  large  farming  involves  some  economy  in  general 
expenses  and  particularly  an  economy  of  labor,  it  has,  on  the 
other  hand,  the  great  twofold  disadvantage  of  diminishing 
the  number  of  producers,  and,  quite  as  often,  of  reducing  the 
quantity  of  products  when  compared  to  the  surface  culti- 

Kansas,  and  California.  Intensive,  small-scale  methods,  on  the  other  hand, 
are  used  in  the  New  England  states,  whose  soil,  moreover,  is  naturally  less 
fertile  than  that  of  the  western  farms. 


Average  acres  per 
farm  reporting 

Average  value 
per  acre 

Average  bushels 
per  acre 

Kansas 

63.7 

$5.03 

10.2 

South  Dakota 

95.7 

5.26 

10.5 

North  Dakota 

134.5 

7.13 

13.5 

California 

212.9 

7.52 

13.6 

Minnesota 

52.0 

7.71 

14.5 

New  Hampshire 

1.7 

12.65 

14.9 

Connecticut 

1.8 

15.47 

22.0 

Rhode  Island 

1.9 

16.33 

20.7 

Maine 

2.0 

16.11  • 

17.5 

Massachusetts 

2.0 

15.95 

18.4 

Vermont 

2.0 

16.19 

19.3 

1  The  census  of  1850  reported  1,449,073  farms  in  the  United  States,  and 
that  of  1900  reported  5,739,657,  — an  addition  of  4,290,584  in  fifty  years. 
The  same  period  witnessed  an  increase  in  the  national  population  from 
23,191,876  to  76,303,387,  and  a  growth  in  the  cities  (of  over  8000  population) 
from  2,897,586  to  25,031,505.  Notwithstanding  this  unprecedented  growth  in 
urban  population,  the  increase  in  the  number  of  farms  was  relatively  greater 
than  that  of  the  total  population,  being  in  the  ratio  of  4  to  3.3.  If  we  con- 
sider the  population  outside  of  cities,  the  following  figures  are  obtained: 
In  1850  there  was  one  farm  for  every  14  persons,  and  in  1900  one  farm  for 
every  8.9  persons. 

As  regards  the  average  size  of  farms  the  official  figures  are  as  follows : 
In  1850,  202.6  acres;  1860,  199.2;  1870,  153.3;  1880,  133.7;  1890,  136.5; 
1900,  146.6.  But  it  must  be  observed  that  the  very  large  farms  are  confined 
almost  exclusively  to  the  western  and  central  states. 


172  PRINCIPLES   OF    POLITICAL   ECONOMY 

vated.  It  may  give  a  greater  net  product,  i.e.  greater  profit 
to  the  landowner,  but  it  generally  yields  a  smaller  gross  prod- 
uct, i.e.  less  food  and  less  wages  for  the  nation.  Now  in 
view  of  the  increasing  density  of  population  in  all  civilized 
countries,  the  future  will  belong  to  the  system  of  farming 
that  can  give  the  greatest  quantity  of  food.  Here  we  find 
another  proof,  and  the  explanation,  of  the  law  mentioned 
when  we  referred  to  the  area  required  by  various  types  of 
society  to  produce  their  food-supply,  viz.,  that  the  necessary 
area  is  reduced  as  we  proceed  from  the  hunting  stage  to  the 
pastoral,  and  from  the  pastoral  .to  the  agricultural.  In  the 
agricultural  period  itself,  there  is  the  same  progress  from 
"  extensive "  to  "  intensive  "  farming,  and  from  intensive 
farming  to  garden-farming  such  as  is  practised  to-day  wher- 
ever population  is  most  dense,  i.e.  in  the  suburbs  of  large 
cities.  Garden-farming,  in  the  vicinity  of  Paris,  where  fruit 
and  vegetables  are  raised  by  hothouse  processes  that  resem- 
ble the  methods  used  for  raising  flowers,  is  said  to  yield  from 
82000  to  $3000  worth  of  vegetables  per  acre,  or  enough  to 
provide  food  for  twenty  or  twenty-five  persons.  In  China, 
a  system  of  very  elaborate  intensive  garden-farming  enables 
the  soil  to  nourish  a  very  dense  population.  Here,  then,  are 
many  reasons  for  thinking  that  the  prophecies  of  the  social- 
ists and  of  some  economists  regarding  this  matter  (the  sole 
point  upon  which  they  agree)  may  be  found  wanting  in 
accuracy.  The  future  probably  belongs  to  small  farming 
rather  than  to  large-scale  agriculture.  The  earth  will  some 
day  be  covered  with  small  garden-farms,  and  the  philosophi- 
cal maxim  of  Voltaire's  Candide,  "  Everybody  will  cultivate 
his  own  garden,"  will  be  realized  in  the  field  of  economics.1 

1  One  circumstance  that  gives  rise  to  the  illusion  concerning  the  natural 
superiority  of  large-scale  agriculture  is  the  intellectual  superiority  almost 
always  possessed  by  the  administrators  of  large  farms ;  the  great  farms  are 
better  kept,  and  exemplify  the  latest  agricultural  improvements.  We  con- 
sequently attribute  to  a  difference  of  agricultural  system  what  really  is  due 
only  to  the  greater  energy  and  intelligence  of  the  persons  in  charge. 


CHAPTER  III  — THE   DIVISION   OF   LABOR 

I.  The  Successive  Forms  of  the  Division  of  Labor 

ASSOCIATION,  of  itself,  means  nothing  more  than  the  group- 
ing of  individual  forces,  each  person  performing  the  same  oper- 
ation ;  this  may  be  called  simple  cooperation.  But  the  term 
"  division  of  labor  "  implies  a  distribution  of  the  work  among 
the  associated  persons  in  such  a  manner  that  each  performs  a 
different  operation ;  this  may  be  called  complex  cooperation. 
If  the  work  to  be  done  is  very  simple,  —  like  digging,  lifting, 
rowing,  or  wood-chopping,  —  it  is  difficult  to  divide  the  work 
into  several  operations ;  each  person  must  execute  the  same 
movements.  But  whenever  the  task  is  more  complex  and 
comprises  various  operations,  there  is  some  advantage  in 
splitting  the  work  into  as  many  fractional  tasks  as  pos- 
sible, and  assigning  a  part  of  it  to  each  of  a  number  of 
persons. 

The  earliest  form  of  the  division  of  labor  was  the  division  ac- 
cording to  sex,  the  men  doing  one  kind  of  work  and  the  women 
another.  The  distinction  of  sex  gave  rise  to  a  difference 
of  economic  functions,  and  the  rudimentary  division  of  tasks 
thus  evolved  coincided  with*  the  first  phase  of  economic 
evolution,  —  the  phase  which  we  have  called  the  home  or 
family  economy.  Yet  this  division  of  labor  is  far  from  cor- 
responding to  the  modern  conception  of  the  peculiar  province 
of  the  two  sexes,  viz.,  the  idea  that  man  should  perform  the 
hard  work  and  woman  the  household  duties.  This  is  by  no 
means  the  original  view  of  the  r61e  of  the  sexes.  Originally 
man  took  the  noble  occupations,  such  as  hunting,  fighting, 
the  care  of  cattle,  while  woman  did  the  base  labor,  including 

173 


174  PRINCIPLES   OF   POLITICAL   ECONOMY 

not  only  the  household  work,  weaving,  etc.,  but  also  the  labor 
of  carrying  goods  like  veritable  beasts  of  burden.  Cura 
agrorum  feminis  delegata,  says  Tacitus,  in  speaking  of  the 
Germans;  we  observe  the  same  thing  nowadays  among  all 
the  tribes  of  Africa.  Woman  was  really  the  first  slave,  and 
the  first  kind  of  slavery  so-called,  —  that  of  captives  taken 
during  intertribal  warfare,  —  was  for  her  the  first  step  toward 
emancipation,  because  it  unburdened  her  of  the  heavier  kinds 
of  labor  (such  as  grinding  the  grain  or  turning  the  mill- 
stone) which  were  transferred  to  the  slaves. 

The  second  phase  —  that  of  corporations  or  guilds  —  coin- 
cided with  a  more  detailed  division  of  labor,  viz.,  the  rise  of 
separate  trades.  Each  guild  or  trade  organization  performed 
only  one  kind  of  labor,  and  the  rules  of  the  guilds  exerted 
a  jealous  care  that  each  one  was  confined  to  its  particular 
specialty.  The  specialization  of  trades  kept  pace  with  the 
gradual  perfection  of  the  guild  system ;  industries  were  di- 
vided and  subdivided  into  branches  or  groups  that  performed 
but  one  part  of  a  trade.  The  wood-workers,  for  example,  were 
divided  into  carpenters,  cabinet-makers,  wheelwrights,  etc. 
Even  allied  trades,  such  as  the  glovers,  girdlers,  pocket  makers, 
skinners,  white  tawyers,  and  other  workers  in  leather ;  or  the 
fletchers  (arrow-makers),  the  bowyers  (makers  of  bows),  and 
the  stringers  (makers  of  bowstrings),  were  organized  into 
separate  bodies.  There  were  no  fewer  than  a  hundred 
craft-guilds  in  Paris  in  the  middle  of  the  thirteenth  century, 
each  of  which  was  regarded  as  forming  a  separate  trade 
organization.1 

In  the  third  phase,  that  of  the  workshop  and  domestic  man- 
ufacturing, the  division  of  labor  attains  the  highest  degree 
of  perfection.  It  was  in  the  workshop  that  the  wonderful 
phenomenon  of  the  division  of  labor  first  attracted  the  atten- 
tion of  Adam  Smith,  and  led  him  to  write  those  classical 
pages  on  the  subject  in  his  "  Wealth  of  Nations  "  which  have 

1  The  German  statistics  for  1882  enumerated  6459  different  occupations, 
not  including  the  liberal  professions. 


THE    DIVISION    OF   LABOR  175 

been  reproduced  time  and  time  again.1  All  industrial  labor, 
as  we  have  seen,  is  simply  a  series  of  movements  (see  page 
73),  and  despite  its  apparent  complexity  may  be  divided 
into  a  number  of  simple  operations.  If,  now,  we  assign  each 
simple  movement  to  one  laborer  or  group  of  laborers,  each 
laborer  or  group  will  constantly  perform  the  same  operation. 

1  Speaking  of  the  trade  of  the  pin-maker,  Adam  Smith  says  (Book  I,  Chap- 
ter 1,  of  the  "  Wealth  of  Nations  ")  :  "A  workman  not  educated  to  this  busi- 
ness (which  the  division  of  labor  has  rendered  a  distinct  trade),  nor 
acquainted  with  the  use  of  machinery  employed  in  it  (to  the  invention  of 
which  the  same  division  of  labor  has  probably  given  occasion),  could  scarce, 
perhaps,  with  his  utmost  industry,  make  one  pin  in  a  day,  and  certainly 
could  not  make  twenty.  But  in  the  way  in  which  this  business  is  now  car- 
ried on,  not  only  the  whole  work  is  a  peculiar  trade,  but  it  is  divided  into  a 
number  of  branches,  of  which  the  greater  part  are  likewise  peculiar  trades. 
One  man  draws  out  the  wire,  another  straights  it,  a  third  cuts  it,  a  fourth 
points  it,  a  fifth  grinds  it  at  the  top  for  receiving  the  head  ;  to  make  the  head 
requires  two  or  three  distinct  operations ;  to  put  it  on  is  a  peculiar  business, 
to  whiten  the  pins  is  another  ;  it  is  even  a  trade  by  itself  to  put  them  into  the 
paper  ;  and  the  important  business  of  making  a  pin  is  in  this  manner  divided 
into  about  eighteen  distinct  operations,  which,  in  some  manufactories, 
are  all  performed  by  distinct  hands,  though  in  others  the  same  man  will 
sometimes  perform  two  or  three  of  them.  I  have  seen  a  small  manufactory 
of  this  kind  where  ten  men  only  were  employed,  and  where  some  of  them 
consequently  performed  two  or  three  distinct  operations.  But  though  they 
were  very  poor,  and  therefore  but  indifferently  accommodated  with  the  neces- 
sary machinery,  they  could,  when  they  exerted  themselves,  make  among 
them  about  twelve  pounds  of  pins  in  a  day.  There  are  in  a  pound  upward  of 
four  thousand  pins  of  a  middling  size.  Those  ten  persons,  therefore,  could 
make  among  them  upward  of  forty-eight  thousand  pins  in  a  day.  Each  per- 
son, therefore,  making  a  tenth  part  of  forty-eight  thousand  pins,  might  be 
considered  as  making  forty-eight  hundred  pins  in  a  day.  But  if  they 
had  all  wrought  separately  and  independently,  and  without  any  of  them 
having  been  educated  to  this  peculiar  business,  they  certainly  could  not  each 
of  them  have  made  twenty,  perhaps  not  one  pin  in  a  day  ;  that  is,  certainly 
not  the  two  hundred  and  fortieth,  perhaps  not  the  forty -eight  hundredth 
part  of  what  they  are  at  present  capable  of  performing,  in  consequence  of  a 
proper  division  and  combination  of  their  different  operations." 

The  example  chosen  by  Adam  Smith  is  out  of  date,  since  pins  are  now 
made  by  machinery,  and  one  thousand  persons  suffice  to  turn  out,  on  an 
average,  twenty-five  tons  of  pins  per  week.  In  Adam  Smith's  time  not  less 
than  four  thousand  two  hundred  were  required  for  the  production  of  about 
one-seventh  of  that  quantity. 


176  PRINCIPLES   OF  POLITICAL  ECONOMY 

In  the  next  phase,  —  that  of  factories,  —  the  division  of 
labor  seems  almost  to  have  retrograded ;  or  rather,  not  men 
but  machines  do  the  specializing. 

Finally,  there  is  beyond  this  another  form  of  the  division 
of  labor,  which  may  be  called  international  division  of  labor, 
because  it  has  grown  up  under  the  influence  of  the  develop- 
ment of  international  transportation  and  exchange.  Each 
nation  devotes  itself  more  especially  to  those  branches  of 
production  which  seem  best  adapted  to  its  soil,  its  climate, 
and  the  abilities  of  its  inhabitants.1  This  tendency,  however, 
which  thirty  years  ago  appeared  to  be  making  great  progress, 
is  now  arrested  at  least  momentarily  by  the  protectionist' 
movement,  which  tends  to  make  each  country  an  autonomous 
market. 

II.   The  Conditions  of  the  Division  of  Labor 

Division  of  labor  is  evidently  most  nearly  perfect  when- 
ever labor  may  most  easily  be  cut  up  into  many  separate  opera- 
tions. But  the  number  of  workmen  must  necessarily  be 
proportionate  to  the  number  of  these  distinct  operations.2  It 
is  furthermore  evident  that  the  number  of  workmen  which  an 
employer  can  afford  to  hire  depends  on  the  amount  of  goods 
to  be  produced.  And  as  the  amount  of  goods  produced  de- 

1  Some  economists  have  referred  to  the  territorial  division  of  labor,  which 
is  essentially  the  same  as  international  division  of  labor,  explained  above, 
and  the  hereditary  division  of  labor,  by  which  certain  occupations  tend  to  be 
confined  to  certain  families  or  races. 

2  It  would  be  a  great  mistake  to  suppose  that  we  could  carry  out  the  divi- 
sion of  labor  by  employing  one  workman  for  each  distinct  operation  ;  gen- 
erally, a  larger  number  is  required.     Suppose  that  the  making  of  needles 
comprises  three  operations  :  making  the  point,  making  the  head,  and  piercing 
the  eye.     Suppose  that  it  takes  ten  seconds  to  make  each  point,  twenty  for 
each  head,  and  thirty  for  each  eye.     It  is  evident  that  in  order  to  keep  busy 
the  workman  who  makes  the  points,  we  need  two  men  to  make  heads  and 
three  to  make  eyes.     It  is  therefore  necessary  to  have,  not  three  but  six 
workmen,  else  the  first  one  will  remain  idle  a  great  part  of  the  time.     It 
would  be  easy  to  complicate  further  our  hypothesis  in  illustration  of  this 
fact. 


THE   DIVISION   OF   LABOR  177. 

pends  necessarily  on  the  size  of  the  market,  we  may  say  ini 
the  last  analysis  that  the  division  of  labor  is  directly  propor-1 
tionate  to  the  size  of  the  market. 

This  is  why,  as  every  one  doubtless  has  observed  frequently, 
the  division  of  labor  prevails  to  a  great  extent  only  in  large 
centres  of  population,  and  is  almost  unknown  in  the  country 
or  in  small  villages.  A  country  store  usually  deals  in  a  pell- 
mell  variety  of  goods, — spices,  meats,  toys,  stationery,  dry 
goods,  and  many  other  articles  which  in  a  large  city  would  be 
distributed  among  different  stores.1  The  reason  for  this  is 
simple.  The  village  storekeeper  is  obliged  to  deal  in  many 
things,  to  be  a  Jack-of-all-trades,  because  a  single  trade  would 
not  be  sufficient  to  enable  him  to  earn  a  livelihood. 

Most  books  on  political  economy  mention  a  second  condi- 
tion necessary  for  the  division  of  labor,  viz. :  continuous,  not 
intermittent,  production  ;  hence  the  conclusion  is  drawn  that 
the  division  of  labor  is  not  applicable  to  agriculture.  This 
conclusion  is  too  sweeping.  Division  of  labor  on  a  farm 
cannot,  to  be  sure,  be  managed  in  the  same  manner  as  in  a 
workshop.  It  would  be  too  expensive  to  have  one  man 
sow,  another  reap,  another  gather  grapes,  or  take  care  of  the 
vines,  or  plant  them ;  because  each  of  these  bperations  must 
take  place  only  at  a  fixed  season  of  the  year  and  for  a  limited 
number  of  days.  Hence  the  workman  whose  task  is  limited  to 
one  of  these  operations  would  be  idle  eleven  months  out  of 
twelve.  But  it  is  possible,  or  at  any  rate  it  would  be  desir- 
able, to  introduce  the  division  of  labor  in  another  form  by 
having  each  man  or  group  of  men  devoted  to  the  cultivation 
of  a  specific  plant.  It  is  even  probable  that  to  the  extent 
that  agriculture  grows  more  intensive  and  more  akin  to  hor- 
ticulture, this  specialization  will  take  place. 

1  It  would  seem  at  first  sight  that  the  city  department  stores  do  the 
same  thing  as  the  country  stores.  But  these  large  stores  really  carry  out  a 
very  thorough  division  of  labor,  each  department  having  its  own  special  man- 
ager. Each  of  the  important  branches  of  the  business  of  a  large  department 
store,  moreover,  has  its  own  "  buyer,"  who  has  charge  of  the  purchasing  and 
marking  of  goods,  and  who  sometimes  receives  as  much  as  $30,000  a  year. 


178  PRINCIPLES   OF   POLITICAL   ECONOMY 


III.    The  Advantages  and  Disadvantages   of   the  Division  of 

Labor 

Division  of  labor  increases  the  productive  power  of  labor 
in  proportions  that  surpass  imagination.  The  reasons  for 
this  are  as  follows :  — 

(1)  As  we  have  already  explained,  the  most  complicated 
work  can  be  divided  into  a  series  of  very  simple  and  almost 
mechanical  operations,  which  are  therefore  very  easy  to  per- 
form ;  in  this  way  production  may  be  facilitated  to  an  amazing 
degree. 

Indeed,  these  operations  may  become  so  simple  that  man's 
labor  is  unnecessary,  and  a  machine  will  do  the  work  just  as 
well.  It  is  the  division  of  work  into  simple  constituent  parts 
that  has  made  it  possible  to  construct  machinery  for  doing 
work  that  at  first  sight  appears  to  be  most  complicated. 

(2)  The  division  of   labor   creates   a   great   diversity  of 
tasks,  each  of  which  differs  from  the  others  in  point  of  diffi- 
culty and  of  the  strength  or  attention  it  requires.      Hence 
we  may  fit  each  of  these  tasks  to  the  individual  capacities  of 
the  workmen.     We  can  utilize  each  man's  natural  aptitudes, 
and  thus  avoid  the  waste  of  time,  strength,  and  capital  which 
would  result  from  having  the  same  work  done  by  all  the 
workmen,   whether  they   are    strong   or   weak,  ignorant   or 
intelligent.     In  other  words,  we  may  thus  avoid  squander- 
ing the  energy  of  the  strongest  and  the  most  capable  on  work 
that  is  too  easy  for  them,  or  wasting  the  labor  of  the  weak 
and  the  ignorant  on  tasks  that  are  beyond  their  powers. 

(3)  The  constant  repetition  of  the  same  task  results  in  devel- 
oping remarkable  dexterity  in  manual  labor,  just  as,  in  intel- 
lectual labor,  sustained  and  persevering  application  singularly 
develops  the  intellectual  faculties,  and  consequently  the  power 
to  produce.     Doctors,  lawyers,  painters,  novelists,  scientists, 
all  have  their  specialties  nowadays;    and  each  man  finds  it 
to  his  advantage  to  settle  in  one  little  corner  of  the  domain 
of  human  knowledge  and  diligently  explore  that  part  alone. 


THE    DIVISION    OF   LABOR  179 

To  the  above  three  reasons  it  is  customary  to  add  three 
others  of  less  importance. 

(4)  Economy  of  time,  which  results  from  continuous  work. 
A  workman  who  changes  often  from  one  task  to  another, 
loses,  at  every  change,  not  only  the  time  which  intervenes 
between  the  two  occupations,  but  especially  the  time  neces- 
sary for  getting  well  started. 

(5)  The  economy  of  implements,  which  reaches  a  maximum 
when  each  laborer  employs  but  one  tool,  and  uses  that  one 
constantly. 

(6)  A  shorter  period  of  apprenticeship.     The  time  needed 
to  learn  a  trade  is  proportionate  to  its  complexity.1 

But  as  opposed  to  all  these  advantages,  some  serious  draw- 
backs have  long  been  pointed  out :  — 

(1)  The  degradation  of  the  workman,  who  performs  the 
same  simple  operation  all  the  time  and  is  thus  reduced  to 
the  r61e  of  a  mere  machine.2 

To  this  objection  the  reply  may  be  made  that  the  intro- 
duction of  machinery  constantly  tends  to  remove  this  evil 
effect  of  the  division  of  labor.  Indeed,  we  may  be  sure  that 
as  soon  as  any  productive  operation  becomes  so  simple,  as  to 
be  purely  mechanical,  it  will  not  be  long  before  the  workman 
will  be  replaced  by  a  machine,  since  machine  labor  is  cheaper 
than  human  labor  in  such  a  case  as  this. 

Again,  the  reduction  in  the  length  of  the  workday,  leav- 
ing the  workman  spare  time  in  which  to  employ  his  mind  and 
body  in  normal  ways,  must  also  be  regarded  as  an  indispen- 
sable corrective  of  the  division  of  labor  in  modern  industry.3 

1  The  suppression  of  apprenticeship,  which  is  quite  as  much  due  to  the 
introduction  of- machinery  as  to  the  division  of  labor,  is  in  itself  a  regrettable 
circumstance,  and  efforts  are  now  being  made  in  many  countries  to  counteract 
its  unfortunate  effects  by  creating  trade  schools. 

2  Lemontey  has  put  this  objection  into  a  classical  phrase  :  "It  is  a  sad 
confession  for  a  man  to  make  that  during  his  whole  life  he  has  done  nothing 
more  than  make  the  eighteenth  part  of  a  pin." 

8  The  socialist  Fourier  believed  that  by  the  aid  of  what  he  called  short  ses- 
sions all  the  advantages  of  the  division  of  labor  might  be  obtained  without 


180  PRINCIPLES   OF   POLITICAL   ECONOMY 

(2)  The  extreme  dependence  of  the  workman  who  is 
incapable  of  doing  anything  except  the  particular  and  en- 
tirely special  operation  to  which  he  has  become  accustomed, 
and  who,  therefore,  is  in  constant  danger  of  being  helpless 
when  discharged  or  when  the  progress  of  industry  makes  his 
particular  task  unnecessary.  Like  the  parts  of  the  commod- 
ity which  he  helps  to  make,  and  which  are  worthless  unless 
combined  with  the  other  fractional  parts  that  make  up  a 
whole  product,  he,  too,  may  be  said  to  have  no  more  impor- 
tance than  that  of  a  single  wheel  in  the  vast  industrial 
machine;  without  the  other  supplementary  parts  he  has  no 
value  and  his  toil  is  worthless. 

What,  then,  must  be  our  final  judgment  regarding  the 
division  of  labor? 

If  we  consider  it  as  applied  in  factories,  no  hesitation  is 
possible.  The  advantages  of  the  division  of  labor  far  out- 
weigh its  disadvantages,  and  these  disadvantages,  even,  are 
largely  imaginary.  To  be  sure,  there  are  many  kinds  of 
mechanical  work  that  stunt  the  intelligence ;  but  this  is  not 
due  to  the  division  of  labor.  The  work  of  a  street-sweeper 
is  not  divided.  Is  it  therefore  nobler  than  that  of  a  laborer 
who  makes  nothing  but  nails  ?  And,  as  some  one  has  wittily 
remarked,  would  the  workman  who  makes  only  pinheads 

its  disadvantages.  He  planned  that  each  laborer  should  ply  not  one  but 
several  trades,  and  pass  in  turn  from  one  to  another.  The  advantages  of 
specialization  thus  are  retained  ;  for  a  man  need  not  work  at  one  thing  his 
whole  life  to  be  able  to  do  it  well.  He  may,  thanks  to  division  of  labor, 
become  skilful  in  five  or  six  different  operations  or  trades,  especially  if  they 
are  simple  ones.  Moreover,  the  deadening  monotony  of  always  performing 
the  same  kind  of  work  is  avoided,  and  Fourier  endeavored  thus  to  satisfy 
what  he  very  picturesquely  called  the  "butterfly  "  instinct,  that  prompts  us 
to  like  change.  This  idea  is  by  no  means  absurd,  though  it  has  been  much 
ridiculed ;  but  its  execution  would  require  that  the  workers  could  change 
work  without  losing  too  much  time.  Hence  Fourier  invented  his  "  Phalan- 
stery," where  all  laborers  are  assembled,  in  order  that  this  rotation  of  work 
might  be  managed  easily  and  in  such  a  way  that  there  would  be  no  difficulty, 
for  instance,  in  having  the  blacksmith  abandon  his  anvil  and  turn  to  rose 
gardening. 


THE   DIVISION   OF   LABOR  181 

gain  much  intellectually  and  morally  by  making  whole  pins  ? 
Admitting,  moreover,  that  apprenticeage  has  been  done  away 
with,  its  place  can  be  taken  advantageously  by  some  plan  for 
giving  the  workman  a  general  trade  education  that  will  help 
him,  although  himself  confined  to  a  single  fractional  task,  to 
understand  what  position  he  occupies  in  the  whole  trade,  and, 
if  need  be,  enable  him  to  pass  from  one  branch  of  it  to  another. 

But  when,  broadening  the  scope  of  our  inquiry,  we  ask 
whether  the  social  division  of  labor  into  special  trades  and 
occupations  is  good,  and  whether  it  should  be  regarded  as 
the  normal  economic  organization  of  the  future,  we  hesitate 
to  reply  affirmatively.  (  Certainly  this  division  of  labor  makes 
men  dependent  on  each  other,  and,  like  the  physiological 
division  of  labor  among  the  organs  of  a  living  body,  it  seems 
to  make  all  the  members  of  society  parts  of  one  and  the  same 
organism,  and  thus  realizes  the  ideal  of  those  who  insist  on 
the  principle  of  social  solidarity  A  Indeed,  many  sociologists 
point  out  this  analogy  approvingly. 

We,  too,  believe  in  social  solidarity  and  interdependence. 
We  hold  with  M.  Espinas  that  "the  aptitude  for  living  apart 
from  others  is  only  a  very  inferior  mark  of  individuality. " 
The  aptitude  for  isolation,  indeed,  is  really  a  characteristic 
of  the  savage,  and  the  savage  is  no  longer  the  ideal  type  of 
humanity,  as  he  was  for  the  writers  of  the  eighteenth  century. 
But  we  dislike  to  regard  the  division  of  labor  as  the  basis  of 
solidarity,  for  the  reasons  that  it  is,  first,  an  unconscious  fact 
of  a  quasi-physiological  nature,  and,  secondly,  because  it 
implies  the  increasing  differentiation  of  individuals  and  tends 
to  subordinate  everything  to  the  interest  of  trade  and  produc- 
tion.1 Now  true  solidarity  tends  to  bring  men  together  and 

1  M.  Durkheim,  in  his  remarkable  book  on  "La  Division  du  Travail 
Social,"  regards  the  division  of  labor  as  the  fundamental  social  law.  He 
even  considers  it  to  be  the  foundation  of  ethics,  and  maintains  that  the  differ- 
entiation of  individual  tasks  makes  each  person  incapable  of  sufficing  unto 
himself  and  hence  obliges  him  to  render  reciprocal  services  and  to  establish 
a  system  of  mutual  consideration  and  assistance. 

The  division  of  social  labor  is,  moreover,  according  to  Durkheim,  both 


182  PRINCIPLES   OF   POLITICAL   ECONOMY 

to  unite  them,  not  to  send  them  off  in  divergent  directions ; 
it  seeks  to  give  each  man  a  more  complete  and  perfect  indi- 
viduality, not  to  make  him  more  and  more  insignificant  by 
reducing  him  to  the  level  of  a  mere  wealth-producing,  wealth- 
transmitting,  or  wealth-exchanging  machine. 

It  is  to  be  hoped,  therefore,  that  the  division  of  social  labor 
into  trades  and  professions  will  not  endanger  the  thorough 
and  harmonious  development  of  human  personality.  This 
hope  is  perfectly  realizable  if  everybody  can  reserve,  apart 
from  the  hours  given  to  his  particular  occupation,  an  increas- 
ing share  of  his  time  and  activity  for  domestic,  civic,  intel- 
lectual, religious,  and  aesthetic  pursuits.  From  this  point  of 
view,  a  reduction  of  the  hours  of  labor  is  a  matter  of  primary 
importance.  (See  Book  IV.) 

the  effect  and  the  corrective  of  the  struggle  for  life.  As  the  struggle  for 
life  is  most  intense  when  individuals  are  most  alike  and  have  the  same  wants, 
everybody  tries  to  become  a  specialist  and  endeavors  to  do  something  dif- 
ferent from  the  others  ;  thus  the  division  of  labor  is  the  effect  of  the  struggle 
for  life.  The  division  of  labor  enables  individuals  to  escape  competition  and 
thus  to  escape  ruin  or  extermination ;  hence  it  is  also  a  corrective  of  the 
struggle  for  life. 


BOOK   III.     THE   CIRCULATION   OF 
WEALTH 


THE  circulation  of  wealth,  more  frequently  called  exchange 
•  in  English  treatises  on  political  economy,  is  really  only  a  part 
of  production,  and  in  the  preceding  editions  of  this  book  it 
was  so  presented.  Indeed,  exchange  is  not  an  end  in  itself, 
for  wealth  is  not  exchanged  simply  for  the  sake  of  exchange. 
Exchange  and  credit  (which  form  the  two  essential  parts  of 
the  circulation  of  wealth),  and  the  ingenious  devices  to 
which  they  give  rise,  are  really  only  methods  of  organizing 
labor,  —  methods  having  absolutely  the  same  purpose  as  asso- 
ciation and  the  division  of  labor,  namely,  to  facilitate  pro- 
duction. The  division  of  labor  and  exchange  are  logically 
and  practically  inseparable  from  each  other. 

Notwithstanding  this  fact,  most  treatises  on  political  econ- 
omy devote  a  special  section  to  the  phenomena  of  exchange 
and  credit.  They  do  this  not  only  because  these  subjects 
are  very  important  and  extensive,  and  it  is  pedagogically 
desirable  to  have  symmetrical  divisions  of  the  science,  nor 
simply  because  they  cover  what  is  called  commerce  as  dis- 
tinguished from  industry  and  agriculture,  but  principally 
because  these  new  methods  of  organizing  labor  coincide  with 
a  separate  and  distinct  stage  in  the  productive  process. 
When  wealth  is  once  created,  the  next  step  is  to  transfer  it ; 
it  does  not  again  change  form,  but  it  changes  owners. 


183 


CHAPTER  I  — EXCHANGE 

I.   The  History  of  Exchange 

EXCHANGE  occupies  an  exceedingly  important  place  in 
modern  life.  Nearly  all  the  wealth  that  is  created  is  pro- 
duced for  the  purpose  of  being  exchanged.  Take  the  wheat 
in  the  granaries,  the  vegetables  in  the  barn,  the  cloth  at  the 
tailor's,  the  shoes  at  the  shoemaker's,  the  jewels  at  the  gold- 
smith's, the  bread  at  the  baker's,  and  ask :  What  part  of  all 
this  wealth  is  destined  by  the  producer  for  his  own  consump- 
tion ?  Very  little  or  none  at  all.  All  these  things  are  mer- 
chandise, i.e.  objects  intended  for  sale.  Our  thrift,  our  skill, 
our  talents  also,  are  most  frequently  applied  not  to  satisfy 
our  own  wants,  but  those  of  others.  It  happens  very  rarely 
that  lawyers,  physicians,  and  notaries  have  to  work  for  them- 
selves, pleading  their  own  cases,  healing  their  own  ailments, 
drawing  up  their  own  documents.  They,  too,  regard  these 
services  only  from  the  point  of  view  of  exchange.  This  is 
why,  when  we  estimate  our  wealth,  we  do  not  estimate  it 
according  to  its  utility  for  us,  but  solely  according  to  its 
exchange  value,  i.e.  its  utility  for  others. 

It  must  not  be  supposed  that  this  state  of  affairs  has  always 
prevailed.  Exchange  is  by  no  means  so  simple  a  process  as 
association  or  as  the  division  of  labor,  both  of  which  are  so 
natural  that  even  certain  animal  species  put  them  into  prac- 
tice. Far  from  being  instinctive,  exchange  seems  originally 
to  have  been  antipathetic  to  human  nature.  Primitive  man 
regarded  the  product  of  his  labor  almost  as  a  part  of  himself. 
Hence  all  sorts  of  strange  and  solemn  formalities  were  at  the 
beginning  attached  to  every  transfer  of  goods,  e.g.  the 
mancipatio  of  Roman  law.  Curiously  enough,  gifts  seem  to 

184 


HISTORY   OF   EXCHANGE  185 

have  been  prevalent  before  exchange,  and  it  is  even  supposed 
that  gifts  gave  rise  to  exchange  in  the  form  of  a  fictitious 
reciprocal  donation.1 

In  the  first  phase  of  industrial  organization  —  that  of  the 
family  —  there  evidently  could  be  no  exchange,  as  each 
group  formed  an  autonomous,  self-sufficing  organism.  It 
was  solely  by  the  labor  of  its  members  and  its  slaves,  and 
later  by  the  toil  required  of  the  serfs,  that  the  group  provided 
for  the  satisfaction  of  its  wants.2  Exchange  took  place  only 
in  those  exceptional  or  accidental  cases  when  a  few  exotic 
products  were  sold  by  foreign  merchants  who  brought  them 
from  abroad.  (See  the  section  on  Merchants.) 

In  the  second  phase  —  that  of  corporative  or  guild  pro- 
duction—  exchange  necessarily  results  from  the  separation 
of  trades.  It  is,  however,  limited  to  one  town.  Producers 
and  consumers,  who  are  also  fellow-burghers,  meet  at  the 
town  market.  Merchants  from  without  soon  succeed  in  pene- 
trating these  markets,  but  not  without  great  difficulty  and 
long  struggles,  and  only  under  certain  rigorous  restrictions.3 

In  the  third  phase — that  of  manufacturing  —  the  market 
grows  wider  and  becomes  national.  Here  exchange  and 
commerce  really  begin.  It  has  been  observed  that  the  rise 
of  national  markets  coincides  with  the  formation  of  the  great 
modern  states.  It  is  noteworthy  that  in  France  the  growth  ' 
of  a  national  market  took  place  at  the  same  time  that  Vauban 
did  away  with  urban  fortifications  and  built  a  national  system 
of  fortifications ;  this  coincidence  demonstrates  in  a  striking 
fashion  the  fact  that  economic,  political,  and  military  evolu- 
tion everywhere  follow  along  parallel  lines. 

The  market  becomes  still  larger  by  becoming  colonial,  when 
the  economic  life  of  a  nation  is  not  confined  within  its  own 

1  See  Herbert  Spencer's  "  Sociology,"  Part  IV. 

2  Consult  Buecher,  "Industrial  Evolution,"  and  Cunningham,  "Western 
Civilization  in  its  Economic  Aspects." 

3  Foreign  merchants  usually  were  permitted  to  sell  goods  in  the  cities  only 
on  these  conditions :  (a)  they  had  to  pay  a  fixed  tax  ;  (6)  they  could  not  sell  at 
retail,  i.e.  to  the  public,  but  only  to  the  merchants  of  the  locality  ;  (c)  they 


186  PRINCIPLES    OP   POLITICAL   ECONOMY 

borders  but  extends  to  its  colonial  possessions.  This  exten- 
sion of  the  market  began  in  the  seventeenth  century,  at  the 
time  when  the  great  commercial  companies  were  founded  that 
subsequently  played  an  important  part  in  history  (for  example, 
the  English  East  .India  Company). 

Then,  finally,  in  the  fourth  stage  —  that  of  machinery,  rail- 
roads, and  steamboats,  —  the  market  becomes  truly  interna- 
tional, and  commerce  acquires  the  enormous  dimensions  that 
have  helped  profoundly  to  modify  the  economic  relations  of 
the  world,  and  have  made  the  problem  of  international  trade 
one  of  the  most  important  problems  of  our  epoch.1 

II.    Exchange  Value 

It  is  an  academic  problem  whether  the  concept  of  value 
can  exist  apart  from  that  of  exchange.  We  believe  that  it 
can.  Value,  as  we  have  said,  is  the  expression  of  a  scale  or 
classification  of  various  kinds  of  wealth,  of  preferences,  or  of 
degrees  of  desirability.  Even  Robinson  Crusoe  had  a  com- 
parative scale  of  values ;  there  were  some  things  he  prized 
more  highly  than  others,  and  he  showed  his  preferences  by 
the  order  in  which  he  saved  goods  from  the  shipwreck,  since 
he  naturally  chose  the  most  desirable  objects  first.  There 
may  be  value,  therefore,  without  exchange.  We  admit, 
however,  that  in  social  life  exchange  is  practically  the  sole 
determinant  of  the  idea  of  value.  Exchange  removes  the 
notion  of  value  from  the  inner  consciousness  in  which,  so  to 
speak,  it  was  slumbering,  and  makes  it  definite  and  vivid. 
Exchange  leads  us  to  compare  our  preferences,  and  makes 
them  more  precise  and  positive. 

The  old  economists,  beginning  with  Adam  Smith,  or  rather 

could  sell  only  at  certain  times  of  the  year  and  at  specified  places.  See 
Ashley's  "Economic  History  of  England,"  and  Cheyney's  "Industrial  and 
Social  History  of  England"  (Macmillan,  1901). 

1  We  do  not,  of  course,  pretend  that  the  chronological  history  of  commerce 
coincides  exactly  with  the  above  outline  ;  we  have  endeavored  simply  to  give 
a  general  sketch  of  its  tendencies  —  a  sort  of  mnemotechnic  generalization. 


EXCHANGE    VALUE  187 

with  Aristotle,  distinguished  two  kinds  of  value:  first,  value 
in  use  (which  may  also  be  called  individual  value),  and 
second,  value  in  exchange  (which  may  be  called  social  value). 
They  showed  that  these  two  values  may  be  quite  different  from 
each  other.  For  instance,  spectacles  have  great  value  for  a 
near-sighted  scientist  who  could  not  read  without  them,  but 
their  value  in  exchange  is  rather  small ;  on  the  other  hand, 
diamond  ear-rings,  which  may  have  a  very  high  exchange  value, 
have  for  him  absolutely  no  value  in  use.1 

What  is  the  reason  for  this  difference  ?  Value  in  use  is 
determined  solely  by  the  wants  and  desires  of  a  person  at  a 
given  moment ;  it  has  no  other  foundation  than  subjective  use- 
fulness. On  the  other  hand,  value  in  exchange  appears  to 
have  a  more  objective  character ;  it  is  uniform  in  one  and 
the  same  market,2  and  is  called  current  price.  Indeed,  this 
value  or  price  is  "  quoted  "  regularly  in  the  newspapers  for  a 
multitude  of  commodities,  and  serves  as  a  basis  for  specula- 
tion. While  value  in  use  is  simply  the  result  of  individual 
subjective  judgments,  value  in  exchange  seems  to  take  pre- 
cedence over  individual  judgments  and  obliges  sellers  and 
buyers  to  "  follow  the  market."  This  is  not  only  a  matter 
of  everyday  experience,  but  an  economic  law  of  the  greatest 

1 A  five-dollar  bill  certainly  has  not  the  same  value  in  use,  that  is  to  say, 
not  the  same  utility,  for  a  millionnaire  as  for  a  poor  man.  To  'the  poor  man  it 
means  several  days'  subsistence,  whereas  to  the  millionnaire  it  means  merely 
some  insignificant  bauble  that  he  might  buy  with  it.  On  the  other  hand,  it 
is  evident  that  the  bill  has  for  both  the  same  value  in  exchange,  inasmuch  as 
all  five-dollar  bills  have  the  same  value,  and  one  bill  will  buy  as  much  as 
another,  under  similar  circumstances. 

2  "  Market,"  in  the  economic  sense  of  the  term,  does  not  mean  a  place  or 
establishment  in  which  goods  are  bought  and  sold,  but  the  totality  of  sales 
and  purchases  —  the  whole  sphere  in  which  the  transfer  of  merchandise  and 
the  communication  between  buyers  and  sellers  is  quick  enough  to  establish  a 
uniform  price.  The  extent  of  markets  varies  according  to  the  nature  of  the 
merchandise.  The  wheat  market,  for  instance,  may  include  a  whole  nation ; 
the  market  for  gold  extends  over  the  whole  world  ;  the  market  for  vegetables 
is  generally  confined  to  a  small  district. 

See  Francis  Walker's  interesting  discussion  of  markets  in  his  "  Political 
Economy." 


188  PRINCIPLES   OF  POLITICAL   ECONOMY 

importance,  and  may  be  formulated  thus  :  In  the  same  market 
there  can  be  only  one  price  for  merchandise  of  the  same  quality.1 
What,  then,  determines  value  in  exchange  ?  Formerly,  in 
the  classical  treatises  on  political  economy,  the  determination 
of  exchange  value  was  explained  by  a  formula  that  was  simple, 
and,  in  appearance  at  least,  perfectly  clear ;  viz.,  that  exchange 
value  varies  directly  with  the  demand,  and  inversely  with  the 
supply.  This  formula  is  now  quite  discredited,  —  perhaps 
too  much  so.  There  are  several  objections  that  may  be  raised 
against  it :  — 

(1)  Despite  its  appearance  of  mathematical  exactitude,  this 
rule  is  contrary  to  facts.     If  the  supply  of  wheat  were  dimin- 
ished by  half  in  a  country  having  no  commerce  with  other 
countries,  its  price  would  be  much   more  than  doubled;  it 
would  be  five  times  as  high.2     Again,  if  the  supply  of  wine 
were  diminished  by  half,  we  may  be  sure  that  the  price  of 
wine  would  not  be  doubled. 

(2)  It  mistakes  the  effect  for  the  cause.    If  an  increase  in 
the  demand  raises  the  price,  it  is  evident  that  the  increase  of 
price  will  in  turn  diminish  the  demand ;  and  if  an  increase 
of  the  supply  makes  prices  fall,  it  is  evident  that  lower  prices 
will  in  turn   tend   to  restrict  the  supply.     In  other  words, 
instead  of  saying  that  demand  and  supply  regulate  prices,  we 
may  just  as  well  say  that  prices  regulate  demand  and  supply.3 

1  Stanley  Jevons  calls  this  the  law  of  indifference,  meaning  that  it  is  a  matter 
of  indifference  whether  we  choose  one  or  the  other  of  two  objects  when  they 
are  identical ;  we  have  no  reason  for  preferring  the  one  to  the  other,  and  will 
not  consent  to  pay  more  for  it  —  no  matter  how  much  more  labor  its  pro- 
duction may  have  cost. 

2  An  English  economist  of  the  seventeenth  century,  Gregory  King,  in  a  cele- 
brated law  which  bears  his  name,  explained  the  relation  between  the  quan- 
tity of  wheat  and  its  price.     For  deficits  of  10,  20,  30,  40,  and  50  per  cent, 
we  should  have  a  rise  in  prices  of  30,  80,  160,  280,  and  450  per  cent,  re- 
spectively.    It  is  of  course  true  that  this  law,  although  valid  at  a  time  when 
England  formed  a  closed  market  for  wheat,  has  to-day  lost  all  practical  im- 
portance because  of  the  international  trade  in  cereals. 

3  Take  any  kind  of  securities  selling  on  the  stock  exchange,  for  example 
3  per  cent  government  bonds,  and  suppose  them   to  be  selling  at  $100. 


UTILITY   THEORY   OF   EXCHANGE   VALUE  189 

(3)  It  attributes  no  intelligible  meaning  to  the  terms  supply 
and  demand.  The  word  supply  may,  to  be  sure,  mean  the 
quantity  of  merchandise,  the  stock  existing  on  the  market, 
although  in  many  cases  a  purely  imaginary  reduction  of  the 
supply  (such  as  the  bare  fear  of  a  bad  harvest)  may  produce  the 
same  result  as  a  real  diminution.  But  what  are  we  to 
understand  by  demand?  The  quantity  in  demand  is  in  fact 
absolutely  indeterminate,  since  it  depends  entirely  on  the 
price.  At  one  cent  a  bottle,  the  demand  for  Bordeaux  wine 
would  be  almost  unlimited  ;  at  $100  a  bottle  there  would  be 
hardly  any  demand  at  all. 

We  must  therefore  inquire  what  other  theories  have  been 
suggested  in  place  of  the  classical  formula.  In  this  connec- 
tion we  shall  encounter  again  the  two  important  theories  out- 
lined in  the  section  devoted  to  value  in  use ;  namely,  the 
theory  of  final  utility  and  the  theory  of  labor  or  cost. 

(A)  Let  us  first  examine  the  utility  theory.  Very  ingen- 
ious as  an  explanation  of  subjective  value,  the  theory  of  final 
utility  finds  greater  difficulty  in  explaining  exchange  value. 
After  showing  that  bread,  for  example,  has  a  different  value 
for  each  person,  and  may  even  have  a  different  value  for  the 
same  person  at  different  times  (according  to  his  state  of 
hunger  or  satiety),  how  can  this  theory  account  for  the  fact 

There  is  always  a  demand  for  a  certain  amount  of  these  bonds,  and  usually 
a  certain  amount  of  them  for  sale.  Suppose  that  at  the  opening  of  the  stock 
exchange  the  amount  of  these  bonds  demanded  is  twice  that  of  those  offered 
for  sale.  Who  would  imagine  that  the  price  will  double  and  reach  $ 200  ? 
Yet  this  is  what  ought  to  take  place  if  the  classical  formula  is  true.  In  reality, 
the  price  quoted  for  these  bonds  may  not  rise  even  $1,  for  the  simple 
reason  that  the  majority  of  people  who  would  buy  at  $100  will  withdraw  as 
soon  as  the  price  rises  above  this  point.  It  is  evident  that  if  the  demand  for 
bonds  diminishes  with  every  increase  in  the  price,  the  supply,  at  the  same 
time  and  for  the  same  reason,  will  increase.  A  time  must  come,  therefore, 
when  the  decreasing  demand  and  the  increasing  supply  are  equal  and  form 
an  equilibrium.  Usually,  a  rise  of  but  a  few  cents  is  sufficient  to  bring  about 
this  result. 

The  same  rules  hold  for  almost  all  kinds  of  merchandise,  to  a  greater  or 
less  extent.  Everywhere  and  always,  the  supply  and  the  demand  tend  to 
establish  an  equilibrium  by  means  of  the  rise  or  fall  in  prices. 


190  PRINCIPLES   OF   POLITICAL   ECONOMY 

that  the  exchange  value  or  money  value  of  wheat  is  the 
same  in  one  market  for  millions  of  persons ;  how,  moreover, 
can  it  explain  that  the  value  of  wheat  does  not  vary  much 
throughout  the  whole  nation,  nor  differ  greatly  from  one 
nation  to  another,  nor  change  considerably  from  year  to 
year  ? 

The  utility  theory  explains  this  by  observing  that  in  order 
to  effect  the  transition  from  many  individual  values  to  a 
uniform  exchange  value  of  a  commodity,  we  must  take  into 
account  its  final  utility  not  only  for  the  possessor  but  also 
for  other  persons,  i.e.  for  possible  purchasers. 

If,  for  instance,  I  have  a  thousand  bushels  of  wheat  in  my 
storehouse,  the  thousandth  bushel  has  no  final  utility  for 
me,  for*  surely  I  have  no  need  of  it.  Yet  it  certainly  has  an 
exchange  value,  which  is  just  the  same  as  that  of  any  other 
bushel ;  for  although  I  myself  have  more  wheat  than  I  need, 
there  are  persons  who  have  not  enough,  and  for  these  persons 
my  thousandth  bushel  has  a  final  utility.  This  utility  con- 
fers a  value  on  the  whole  quantity.1 

The  manner  in  which  exchange  value  is  fixed  in  an  open 
market  under  ordinary  circumstances  may  best  be  explained 
by  an  example.  Suppose  that  at  a  given  time  there  are 


1  In  reality  the  problem  is  much  more  complicated  than  this.  Fortunately 
for  the  consumer  and  for  the  general  public,  the  market  price  is  not  always 
determined  by  the  purchaser  most  desirous  of  buying,  i.e.  the  person  who 
attributes  a  maximum  individual  value  to  the  object.  For  we  must  remember 
that  the  seller  is  not  alone.  There  are  other  sellers  quite  as  anxious  as  he 
to  dispose  of  their  goods  —  perhaps  more  so.  Consequently,  might  we  not 
just  as  well  say  that  the  price  will  be  determined  by  the  seller  who  is  most 
desirous  of  disposing  of  his  goods,  or  who  is  most  in  need  of  money,  i.e. 
by  him  who  attributes  to  the  object  the  minimum  individual  (or  subjective) 
value  ?  Under  these  conditions  the  problem  would  still  remain  unsolved. 

The  Austrian  school  solves  the  difficulty  by  declaring  that  in  reality  neither 
of  these  two  persons  determines  the  price.  On  the  contrary,  they  stand  aside 
and  wait  until  the  rates  are  fixed  by  others.  The  buyer  who  is  most  dis- 
posed to  offer  a  high  price  will  not  be  foolish  enough  to  pay  an  exorbitant 
price  if  he  can  get  the  object  cheaper.  And,  on  the  other  hand,  the  seller 
most  anxious  to  dispose  of  his  goods  will  take  care  not  to  sell  them  at  a 


UTILITY   THEORY   OF   EXCHANGE   VALUE  191 

several  persons  prepared  to  sell  coats,  provided  they  can  ob- 
tain a  sufficiently  high  price.  Suppose,  furthermore,  in  order 
not  to  obscure  the  point  at  issue,  that  all  these  coats  are  of  the 
same  quality  and  that  each  prospective  seller  has  but  one  coat 
to  dispose  of.  Now  it  is  evident  that  these  possessors  of  coats 
do  not  all  require  the  same  inducement  to  part  with  their 
goods ;  some  will  not  give  them  up  except  for  a  high  price, 
while  others  (who  are  perhaps  in  great  need  of  money)  will 
accept  a  very  small  price.  Let  us  assume  that :  — 

A  is  willing  to  sell  his  coat  for  $10.00 

B  is  willing  to  sell  his  coat  for  9.00 

C  is  willing  to  sell  his  coat  for  8.00 

D  is  willing  to  sell  his  coat  for  7.00 

E  is  willing  to  sell  his  coat  for  6.00 

F  is  willing  to  sell  his  coat  for  5.00 

G  is  willing  to  sell  his  coat  for  4.00 

H  is  willing  to  sell  his  coat  for  3.00 

I   is  willing  to  sell  his  coat  for  2.00 

J  is  willing  to  sell  his  coat  for  1.00 

On  the  other  hand  there  are  several  persons  contemplating 
the  purchase  of  a  coat.  Not  all  of  them  are  willing  to  make 
the  same  sacrifice  to  obtain  one,  but  if  they  should  find  that  the 
price  is  so  low  that  the  coat  would  be  more  useful  than  the 
money  paid  in  exchange  for  it,  they  would  not  hesitate  to 

price  lower  than  is  necessary.  Therefore  both  of  them  await  developments. 
They  wait  until  the  purchaser  who  is  least  anxious  to  buy  has  met  and  dealt 
with  the  seller  who  is  least  anxious  to  sell.  These  are  the  persons  who,  by 
virtue  of  their  stronger  economic  position,  determine  the  market  price.  They 
are  called  the  "marginal  pair." 

But,  admitting  the  validity  of  this  proof,  we  must  remark  that  it  results 
in  the  rather  curious  consequence  that  exchange  value  coincides  in  reality 
with  the  final  utility  of  a  commodity  for  none  of  the  buyers  and  none  of  the 
sellers,  except  one  of  each  I  This  is  indeed  a  case  in  which  the  exception  is 
held  to  be  more  important  than  the  rule.  (This  criticism  is  developed  by 
Macfarlane,  in  his  book  on  "Value  and  Distribution,"  Philadelphia,  1899.) 

Those  who  are  curious  to  know  how  a  subtle  thinker  juggles  with  these 
difficulties  may  consult  Boehm-Bawerk's  remarkable  book  on  "Capital," 
which  has  been  translated  into  English  ;  or  a  very  complete  summary  of  the 
theory  in  Smart's  "  Introduction  to  the  Theory  of  Value." 


192  PRINCIPLES   OF   POLITICAL   ECONOMY 

buy  one.     Not  all  will  be  willing  or  able  to  make  the  same 
sacrifice.     Let  us  assume  that :  — 

K  is  willing,  if  necessary,  to  pay  $8.00 

L  is  willing,  if  necessary,  to  pay  7.50 

M  is  willing,  if  necessary,  to  pay  7.00 

N  is  willing,  if  necessary,  to  pay  6.50 

O  is  willing,  if  necessary,  to  pay  6.00 

P  is  willing,  if  necessary,  to  pay  5.00 

Q  is  willing,  if  necessary,  to  pay  3.50 

R  is  willing,  if  necessary,  to  pay  3.00 

S  is  willing,  if  necessary,  to  pay  2.50 

T  is  willing,  if  necessary,  to  pay  .50 

Now  under  these  circumstances  it  is  evident  that  neither  A 
nor  B  will  sell  his  coat,  since  the  purchaser  most  eager  to  buy 
will  not  give  more  than  18.00.  It  is  equally  evident  that  T 
cannot  expect  to  acquire  a  coat,  since  the  seller  most  anxious 
to  dispose  of  his  coat  will  not  accept  less  than  $1.00.  Con- 
sequently the  market  price  will  be  somewhere  between  $8.00 
and  $1.00.  C  is  willing  to  sell  his  coat  for  $8.00,  and  K  is 
willing  to  pay  this  price.  Will  the  price  therefore  be  $8.00? 
This  is  extremely  unlikely,  because  there  are  seven  coats  on 
the  market  that  can  be  bought  for  less  than  $8.00  each,  and  C 
will  not  pay  $8.00  for  what  he  can  get  for  less.  J,  for  ex- 
ample, will,  if  necessary,  sell  his  coat  for  $1.00.  Will  $1.00 
therefore  be  the  market  price  ?  Again  we  must  answer  neg- 
atively, because  there  are  nine  persons  willing  to  pay  more 
than  $1.00  for  a  coat,  and  only  one  coat  available  at  that- 
price.  Will  the  price  be  $6.00  ?  .  If  it  is,  we  shall  have  six 
coats  available  at  this  price,  and  only  five  purchasers.  Will 
the  price  be  $5.00?  If  so,  we  shall  have  six  purchasers,  and 
only  five  coats  for  sale.  Therefore  the  price  must  be  some- 
where between  $5.00  and  $6.00,  perhaps  $5.50.  For  at  thi? 
price  five  coat-owners  find  it  profitable  to  sell,  and  five  intend- 
ing purchasers  find  it  to  their  advantage  to  buy.1 

1  If  the  price  is  $5.50,  the  man  who  would,  if  necessary,  have  sold  his  coat 
for  §1.00  may  be  regarded  as  having  achieved  a  gain  of  $4.50.  The  man  who 
would,  if  necessary,  have  paid  $8.00  may  be  said  to  have  gained  $2.50  by 


COST   THEORY    OF    EXCHANGE   VALUE  193 

(B)  Let  us  now  examine  the  labor  or  cost  theory.  This 
theory,  which  founds  value  on  labor,  at  first  seems  to  give  a 
better  explanation  of  exchange  value.  The  current  price  of 
merchandise  on  the  market  appears  generally  to  be  regulated 
by  the  cost  of  production.  Now  what  is  the  cost  of  produc- 
tion but  the  quantity  of  labor  expended  in  producing  a  com- 
modity? We  must  inquire,  however,  what  is  meant  by 
quantity  of  labor. 

If  quantity  of  labor  means  the  duration  of  labor,  or  the 
amount  of  effort  expended,  measured  by  means  of  some  sort 
of  energo-meter,  then  this  theory  is  disproved  by  facts,  and 
is  far  from  explaining  them.  Exchange  value  and  price 
bear  no  necessary  relation  whatever  to  the  time  or  trouble 
of  production.  (See  page  59.) 

If  quantity  of  labor  means  the  sum  of  values  expended  in 
raw  material,  manual  labor,  etc.,  then  this  theory  harmonizes 
with  actual  facts,  but  no  longer  explains  anything.  It  simply 
amounts  to  the  discovery  that  the  value  of  the  whole  product 
is  equal  to  the  sum  of  the  values  of  its  parts,  which  is  a 
self-evident  truth. 

At  all  events  we  must  not  say,  as  is  said  so  often,  that 
value  is  determined  by  the  cost  of  production.  For  we  might 
just  as  well  say,  as  opposed  to  this  statement,  that  it  is  the 
value  of  things  which  determines  their  production  and  regu- 
lates the  expenses  that  are  necessary  for  this  purpose.  The 
art  of  the  industrial  manager  consists  precisely  in  foreseeing 
what  the  wants  of  men  will  be  and  what  value  men  will 
attribute  to  certain  things;  he  will  so  arrange  and  conduct 
production  as  not  to  expend  more  in  producing  goods  than 
people  will  be  willing  to  pay  for  them.  If  lie  is  clever 
enough  to  expend  less,  he  will  reap  a  profit.  If  he  unwisely 
expends  more,  he  will  lose;  but  the  value  of  his  product 

purchasing  a  coat  at  the  market  price.  Indeed,  each  seller  and  each  pur- 
chaser must  gain  something  by  the  transaction  at  $5.50,  else  he  would  not 
exchange.  These  gains  are  sometimes  called  quasi-rents,  because  of  their 
fundamental  resemblance  to  the  phenomenon  of  land-rent. 


194  PRINCIPLES   OF   POLITICAL  ECONOMY 

will  not  be  increased  by  so  much  as  a  single  cent,  if  he  suc- 
ceeds or  if  he  fails.     (See  the  section  on  Profit.) 

Hence  there  is  here  no  necessary  relation  of  cause  and 
effect;  that  is  to  say,  neither  the  cost  of  production  nor  value 
is  the  cause  or  effect  of  the  other.  We  may  simply  say  that 
under  the  pressure  of  an  exterior  cause,  —  competition,  —  and 
only  where  this  pressure  exists,  the  cost  of  production  and  the 
value  of  the  product  always  tend  to  coincide.1  This  relation  is 
one  of  the  most  important  in  political  economy,  but  it  does 
not  by  any  means  indicate  the  cause  of  value. 

1  In  the  original  French  edition  of  this  book,  Professor  Gide  remarks  that 
in  all  cases  of  monopoly  this  relation  between  the  cost  of  production  and 
value  no  longer  holds  true.  It  must  not  be  supposed,  however,  that  mo- 
nopolies can  or  will  arbitrarily  put  up  prices.  For  if  prices  are  exceedingly 
high,  sales  will  be  correspondingly  small,  and  although  the  percentage  of 
profit  on  sales  will  be  large,  the  total  profits  will  be  small.  As  the  interest  of 
business  concerns  is  to  achieve  the  highest  possible  total  profits,  a  monopoly 
will  probably  find  it  advantageous  to  lower  prices  so  as  to  increase  sales  ;  in 
fact,  it  will  endeavor  so  to  adjust  prices  as  to  obtain  not  the  highest  possible 
profit  on  each  article  sold,  but  the  highest  total  profit  on  all  goods  sold. 

It  may  be  suggested  that  perhaps  the  commodity  in  question  is  a  necessity 
of  life,  and  that  consequently  the  monopolist  is  absolute  ruler  in  this  particular 
field  of  production.  To  this  it  may  nevertheless  be  objected  that  there  is  no 
absolute  necessity  of  life.  Take  bread,  for  example,  or  meat — both  of  which 
are  regarded  as  types  of  necessities.  If  the  price  for  these  goods  is  exceed- 
ingly high,  many  persons  will  consume  other  articles  of  food,  either  because 
they  are  obliged  to  do  so,  or  because  they  are  not  sufficiently  fond  of  bread 
and  meat  to  pay  very  high  prices  for  them  ;  they  would  rather  eat  vegetables 
and  fruit. 

There  is,  moreover,  always  a  certain  degree  of  potential  competition,  — 
competition  which  is  sure  to  spring  up  if  prices  become  extortionate,  and 
which  keeps  prices  within  reasonable  limits.  In  this  sense,  the  pressure  of 
competition  is  felt  even  by  monopolies  and  trusts.  (This  point  is  discussed 
by  J.  A.  Hobson,  "The  Evolution  of  Modern  Capitalism,"  pp.  153  et  seq.,  and 
by  Collier,  "The  Trust,"  Chapter  VI.) 

Whenever  in  the  productive  process  there  is  an  element  of  monopoly,  value 
and  the  cost  of  production  manifestly  will  not  coincide.  It  is  customary, 
moreover,  to  regard  the  profits  of  the  manager  or  entrepreneur  as  the  margin 
between  the  market  value  of  the  goods  and  their  cost  of  production.  There 
are,  to  be  sure,  some  economists  who  maintain  as  a  general  principle  that  cost 
of  production  and  value  tend  to  become  absolutely  equal ;  but  they  consider 
normal  profit  to  be  itself  a  part  of  the  cost  of  production. 


CAUSES   OF   EXCHANGE   VALUE  195 

In  a  word,  we  must  conclude  with  regard  to  exchange 
value,  as  well  as  with  regard  to  value  in  general  (see  page  64), 
that  it  is  fruitless  to  seek  a  single  cause  or  basis.  The  best 
way  out  of  the  difficulty,  as  Stanley  Jevons  and  M.  Vilifredo 
Pareto  have  proposed,  is  to  remove  the  word  "  value  "  from 
the  economic  vocabulary  and  substitute  the  expression 
"exchange relation."  It  is  indeed  only  a  relation  ;  the  causes 
of  this  relation  are  not  so  important  as  the  conditions  which 
it  must  fulfil.  These  conditions  may  be  reduced  to  two, 
which  together  are  necessary  and  sufficient :  — 

(1)  The  current  price  must  be   such   that   demand   and 
supply  coincide  exactly,  for  it  is  evident  that  there  cannot 
be  more  merchandise  sold  than  bought,  nor,  inversely,  more 
bought  than  sold. 

(2)  The    current   price   must   be    such    that    all    parties 
(sellers  and  buyers),  even  the  least  favored,  secure  a  gain  in 
utility.     For  it  is  evident  that  if  there  is  not  an  advantage 
of  some  sort  for  both  parties  to  an  exchange,  the  transaction 
will  not  take  place. 

The  old  and  discredited  formula  of  supply  and  demand, 
in  spite  of  its  commonplace  appearance,  possessed  the  merit 
of  indicating  very  well  the  various  elements  of  value,  and 
especially  the  two  predominating  points  that  we  have  men- 
tioned. It  explains  clearly  enough  what  M.  Vilifredo 
Pareto  has  expressed  in  the  much  more  scientific  but  more 
abstract  formula:  "Value  arises  from  the  contrast  between 
tastes  and  obstacles."  The  supply  is  not  only  the  quantity 
of  goods  obtainable  in  the  market  at  a  given  time,  but  it 
must  also  take  into  account  all  the  circumstances  which  (by 
facilitating  production  or  rendering  it  more  difficult)  may 
vary  this  quantity.  The  demand  is  the  intensity  of  the  in- 
numerable and  fluctuating  desires  for  a  given  commodity.  To 
say  that  value  increases  when  the  demand  increases  means 
that  things  are  more  desired  when  the  need  for  them  grows 
and  the  quantity  remains  the  same.  To  say  that  value  de- 
creases when  the  supply  increases  means  that  things  are  less 


196  PRINCIPLES    OF    POLITICAL    ECONOMY 

desired  when  the  quantity  increases  and  the  need  remains  the 
same.     And  this  is  a  true  statement  of  the  facts. 


III.    How  Value  is  measured  by  Exchange 

As  value  is  degree  of  desirability,  to  measure  the  value  of 
a  thing  is  to  measure  the  intensity  of  the  desire  which  that 
thing  calls  forth  within  us.  But,  it  may  be  asked,  is  it 
possible  to  measure  desires?  Although  not  directly,  it  is 
certainly  possible  indirectly.  All  measures  are  simply  com- 
parisons. Just  as  in  determining  the  weight  of  an  object,  we 
compare  the  earth's  attraction  for  it  with  the  earth's  attrac- 
tion for  some  other  object,  similarly  we  can  measure  the  value 
of  a  commodity  by  comparing  the  attractiveness  which  it  has 
for  us  with  the  attractiveness  of  some  other  object. 

It  is  true  that  to  weigh  or  measure  desires  we  have  no 
scales  or  foot-rules ;  but  we  do  have  a  means  that  is  no  less 
accurate,  viz.,  exchange.  In  every  act  of  exchange,  each  party 
to  the  transaction  is  called  upon  to  make  a  certain  sacrifice  to 
satisfy  his  desire  ;  in  order  to  obtain  what  he  wants,  he  must 
relinquish  a  certain  quantity  of  the  wealth  he  possesses. 
Now  it  is  evident  that  the  extent  of  the  sacrifice  made  is 
a  good  measure  of  the  intensity  of  his  desire  for  the  object 
obtained.  When  a  South  African  Basuto  pays  ten  oxen  for 
a  wife,  is  this  not  a  proof  that  for  him  the  woman  is  ten  times 
as  desirable  as  an  ox  ? 

[It  is  not  customary  in  English  to  speak  of  our  desire  for 
things  already  in  our  possession ;  when  we  have  obtained 
them,  we  are  no  longer  supposed  to  desire  them,  and  desire 
is,  in  one  sense,  extinguished  by  possession.  But  it  cannot  be 
said  that  things  are  less  desirable  when  we  possess  them  than 
when  we  do  not ;  our  feeling  toward  things  may  be  just  the 
same  after  possession  as  before,  and  our  appreciation  of  them 
just  as  great.  In  this  sense  our  desire  attaches  to  things  we 
own,  quite  as  well  as  to  things  we  wish  to  own.  But  our 
estimate  of  the  desirability  of  an  object  often  becomes  clear 


THE   MEASURE   OF    EXCHANGE    VALUE  197 

and  definite  only  when  we  contemplate  giving  it  up.  Hence 
we  may  be  said  to  compare  our  desire  for  an  object  we  possess 
with  our  desire  for  an  object  offered  us  in  exchange  for  it.] 

Whenever  we  have  a  high  appreciation  of  (or,  if  we  may 
use  the  word  in  this  peculiar  sense,  a  keen  desire  for)  an 
object  we  possess,  it  will  take  a  large  quantity  of  other 
wealth  to  induce  us  to  part  with  it ;  that  is  to  say,  a  con- 
siderable amount  of  proffered  wealth  is  required  to  arouse 
in  our  minds  a  desire  opposed  to  that  which  leads  us  to  re- 
tain possession,  and  sufficient  to  turn  the  scale  in  favor  of 
the  new  desire.  It  is  perfectly  correct,  therefore,  to  declare 
that  the  value  of  a  thing  is  measured  by  the  quantity  of  other 
things  for  which  it  can  be  exchanged ;  or,  more  briefly,  the 
value  of  a  thing  is  expressed  by  its  purchasing  power.1 

If,  then,  I  can  exchange  an  ox  for  ten  sheep,  I  may  say 
that  the  value  of  an  ox  is  ten  times  that  of  a  sheep';  or, 
inversely,  that  the  value  of  a  sheep  is  one-tenth  that  of  an 
ox.  This  may  be  expressed  in  the  formula :  The  values  of 
any  two  commodities  are  inversely  proportionate  to  the  quanti- 
ties exchanged.  The  greater  the  quantity  of  a  commodity 
that  I  must  relinquish  in  exchanging  it  for  another,  the  less 
is  its  value  as  compared  with  the  other  commodity,  and  vice 
versa.  Measuring  values  is  exactly  like  weighing.  When 
the  two  sides  of  the  scales  are  on  the  same  level,  the  weights 
of  the  objects  are  inversely  proportionate  to  the  quantities 
weighed.  If  we  have  to  put  ten  sheep  into  one  scale  to  bal- 
ance an  ox  in  the  other,  this  indicates  that  the  weight  of  a 
sheep  is  only  one-tenth  the  weight  of  an  ox. 

IV.   The  Advantages  of  Exchange 

Whether  exchange  should  be  considered  as  productive  is 
an  old  question  for  debate  among  economists.  The  physio- 

1  But  we  must  not  say,  as  is  often  said,  that  purchasing  power  constitutes 
value.  Our  desire  alone  constitutes  value.  Purchasing  power  is  only  an 
effect  of  value,  just  as  the  attractive  power  of  an  electromagnet  is  merely  the 
effect  of  the  current  passing  through  it. 


198  PRINCIPLES   OF    POLITICAL    ECONOMY 

crats  answered  it  negatively.  They  even  tried  to  prove  that 
exchange  could  profit  no  one.  For,  said  they,  all  exchange, 
if  it  is  equitable,  presupposes  the  equivalence  of  the  two 
values  exchanged,  and  consequently  implies  that  there  is 
neither  gain  nor  loss  on  either  side.  It  is  true  that  one  party 
may  be  cheated ;  but  in  that  case  one  man's  profit  is  balanced 
by  the  other's  loss,  so  that  in  any  case  the  result  is  naught. 

This  argument  is  purely  sophistical,  and  was  refuted  by 
Condillac  long  ago.  If  exchange  never  led  to  profit,  or  if 
every  exchange  necessarily  implied  that  some  one  had  been 
cheated,  it  is  difficult  to  understand  why  men  have  persisted 
for  so  many  centuries  in  carrying  on  exchange.  In  reality, 
whatever  I  yield  in  exchange  for  something  else  is  always 
less  useful  for  me,  less  desirable,  and  hence  worth  less,  than 
the  thing  I  acquire.  Otherwise  I  should  not  give  it  up. 
The  person  who  exchanges  with  me  pursues  exactly  the  same 
line  of  thought.  Each  of  us  thinks  that  by  the  exchange 
he  receives  more  than  he  gives ;  and  however  strange  this 
may  appear,  we  are  both  right.  In  our  different  opinions 
regarding  the  value  and  desirability  of  things,  there  is  no 
contradiction.  Do  we  not  know  that  the  utility  of  all  things 
is  purely  subjective,  and  that  it  varies  according  to  the  wants 
and  desires  of  each  person  ?  (See  what  we  have  already  said 
with  regard  to  Utility,  page  52.) 

Without  continuing  the  discussion  of  these  subtle  distinc- 
tions, we  shall  state  briefly  the  advantages  of  exchange  from 
the  practical  point  of  view. 

(1)  Exchange  enables  us  to  utilize,  in  the  best  way  possi- 
ble, a  large  quantity  of  wealth  which  without  exchange  would 
remain  unused.  Without  exchange,  what  would  England 
do  with  her  coal,  California  with  her  gold,  Peru  with  her 
guano,  Brazil  with  her  cinchona  bark?  When  analyzing  the 
notion  of  wealth,  we  found  that  an  indispensable  condition 
of  any  object  ranking  as  wealth  was  its  capability  of  being 
utilized.  And  in  order  that  this  may  be  effected,  the  article 
must  be  conveyed  by  means  of  exchange  to  the  person  who  is 


ADVANTAGES  OF  EXCHANGE  199 

to  use  it  —  the  quinine  to  the  fever  patient,  the  guano  to  the 
farmer,  the  coal  to  the  manufacturer.  Suppose  that  exchange 
were  suppressed  everywhere,  and  that  all  persons  and  all 
nations  were  obliged  to  keep  all  the  wealth  they  possess. 
What  an  enormous  mass  of  wealth  would  thus  be  condemned 
to  remain  useless,  and  doomed  to  destruction !  Not  only 
must  we  say  that  without  exchange  the  greater  part  of 
wealth  would  not  be  used,  but  we  must  add  that  it  would 
never  have  been  produced.1 

In  other  words,  we  must  regard  exchange  as  the  last  of  the 
series  of  productive  acts  that  begins  with  invention  (which 
is  also  an  immaterial  act)  and  continues  throughout  the 
whole  list  of  agricultural,  manufacturing,  and  transporting 
industries,  bringing  products  step  by  step  nearer  to  their 
final  destination,  which  is,  to  come  into  the  possession  of  the 
persons  who  will  use  them.  These  steps  are  changes  of 
form,  changes  of  place,  and  changes  of  ownership  —  all  three 
of  which  are  equally  indispensable  to  the  attainment  of  the 
final  result. 

(2)  Exchange  enables  us  to  utilize  in  the  best  way  a  host 
of  productive  capacities  which  without  exchange  would  remain 
inactive.  If  there  were  no  such  thing  as  exchange,  each  man 
would  be  compelled  to  produce  all  that  is  necessary  to  supply 
his  wants.  If  his  wants  were  ten  in  number,  he  would  have 
to  ply  ten  different  trades.  Whether  he  did  this  well  or 
not  would  not  alter  the  facts  of  the  case ;  he  would  be 
obliged  to  regulate  his  production  not  according  to  his  apti- 
tudes, but  according  to  his  wants.  With  the  introduction  of 
exchange,  however,  the  state  of  affairs  is  completely  changed. 
Every  one  is  then  sure  of  obtaining  by  exchange  just  what  he 

1  Might  one  not  object  that  exchange,  although  indispensable  under  a  sys- 
tem of  private  property,  would  under  a  system  of  communism  no  longer  have 
any  reason  to  exist,  and  would  therefore  disappear  ?  We  must  reply  that 
even  under  a  communistic  system  the  producer  is  not  the  same  as  the  con- 
sumer, and  it  would  therefore  be  necessary  for  things  to  change  hands. 
Turning  things  into  a  common  store  from  which  each  member  of  society 
takes  that  which  he  needs,  is  also  a  kind  of  exchange. 


200  PRINCIPLES    OF   POLITICAL    ECONOMY 

needs ;  every  one,  moreover,  devotes  himself  to  the  produc- 
tion of  those  things  that  he  can  produce  best.  He  regulates 
his  production  not  according  to  his  wants,  but  according  to 
his  aptitudes  or  his  means.  Before  the  era  of  exchange, 
every  one  was  obliged  to  produce  what  he  needed  most ;  now 
every  one  devotes  himself  solely  to  the  production  of  what- 
ever he  can  most  easily  produce.  This  is  a  most  important 
and  wonderful  progress. 

It  may  be  said  that  these  advantages  of  exchange  greatly 
resemble  those  afforded  by  the  division  of  labor ;  and,  in  fact, 
they  are  the  same,  only  greatly  increased  and  multiplied.  If 
there  were  no  exchange,  association  and  division  of  labor 
would  require  a  previous  agreement  among  those  who  are  to 
work  in  harmony.  What  would  be  the  use  of  the  most  per- 
fect division  of  labor  in  an  immense  factory  producing  (let 
us  say)  hats,  unless  other  persons  were  simultaneously  pro- 
ducing food,  shoes,  houses,  etc.,  to  exchange  for  these  hats  ? 
Exchange  dispenses  with  the  necessity  for  a  preliminary 
agreement,  and  thus  enables  the  division  of  labor  to  extend 
beyond  the  narrow  circle  of  the  home  and  the  workshop,  and 
spread  over  the  whole  industrial  community,  reaching  even 
to  the  extremes  of  the  earth.  Under  a  system  of  exchange, 
each  man  —  no  matter  where  he  may  be  —  produces  according 
to  his  natural  or  acquired  aptitudes  and  according  to  the 
facilities  offered  by  the  region  which  he  inhabits  ;  he  devotes 
himself  entirely  to  one  kind  of  labor,  and  always  puts  the 
same  product  on  the  market,  with  a  certainty  that  the  in- 
genious arrangements  which  we  are  about  to  describe  will 
permit  him  to  receive  in  exchange  any  other  objects  that  he 
wants.  It  has  often  been  remarked  that  the  things  which 
any  one  of  us  consumes  in  a  day,  are  the  combined  result  of 
the  toil  of  hundreds  or  perhaps  thousands  of  workers  who 
are  united  one  to  another  by  invisible  but  none  the  less  real 
bonds  of  association.1 

1  It  is  said  that  Mr.  Carnegie,  at  a  dinner  which  he  gave  to  the  members 
of  the  Pan-American  Congress  in  1890,  remarked  with  some  pride,  "Almost 


HISTORY    OF    MERCHANTS  201 

V.   The  Means  of  facilitating  Exchange 

Exchange  would  be  very  difficult  —  almost  impossible  — 
had  not  ingenious  means  been  contrived  for  simplifying  and 
facilitating  it.  These  means  of  exchange  may  be  classified 
as  follows :  — 

(1)  The  formation  of  a  class  of  middlemen  called  merchants 
or  traders,  and  the  rise  of  various  processes  that  have  been 
devised  for  bringing  producers  and  consumers  together. 

(2)  The  creation  and  improvement  of  means  of  transporta- 
tion designed  to  facilitate  the  conveyance  of  commodities. 

(3)  The  invention  of  a  commodity  called  money,  designed 
to  serve  as  a  go-between  in  exchange,  and  enabling  us  to 
divide  barter  into  sale  and  purchase. 

We  shall  say  but  a  few  words  regarding  the  first  two  of 
these  institutions  ;  the  third,  because  of  its  importance,  will 
require  several  pages. 

VI.   History  of  the  Part  played  by  Merchants 

Contrary  to  what  we  might  be  disposed  to  believe,  com- 
merce or  exchange  did  not  first  take  place  among  neighbors 
and  then  extend  wider  and  wider  in  its  scope.  The  mem- 
bers of  the  same  family  or  clan  are  entirely  too  much  alike 
in  wants  and  in  habits  to  permit  of  any  diversification  of 
desires  or  products ;  the  division  of  labor  among  them  is  too 
slightly  developed  to  give  rise  to  regular  exchange  relations. 
When  each  member  of  the  family  or  clan  (or  even  when  each 
family  or  clan  as  a  whole)  produces  the  same  things,  how  can 
there  be  any  interchange  of  goods  ?  Exchange  was  as  a  mat- 
ter of  fact  first  practised  among  peoples  and  regions  far  dis- 

the  whole  world  has  helped  to  provide  the  dinner  which  will  be  served  to 
you."  Doubtless  this  was  true.  But  the  same  thing  is  also  true  of  a  poor 
man's  dinner.  As  M.  de  Laveleye  has  well  said  :  "  The  poorest  laborer  con- 
sumes the  products  of  the  two  hemispheres.  The  wool  for  his  clothes  comes 
from  Australia,  the  rice  in  his  soup  from  India,  the  wheat  in  his  bread  from 
Illinois,  the  oil  for  his  lamp  from  Pennsylvania,  his  coffee  from  Java." 


202  PRINCIPLES    OF    POLITICAL    ECONOMY 

tant  and  different  from  each  other.  Diversity  of  products 
and  customs  resulted  from  diversity  of  natural  environment. 
Commerce,  therefore,  was  international  before  it  became 
local.  It  was  maritime  before  it  became  overland.  The  first 
merchants  or  traders  were  sailors  or  adventurers,  such  as  we 
read  about  in  the  travels  of  Marco  Polo,  or  in  the  imaginary 
journe}rs  of  Sinbad  the  Sailor  in  the  "Arabian  Nights." 

As  commerce  was  originally  carried  on  only  with  foreigners 
(or,  as  the  two  terms  were  originally  synonymous,  with 
enemies),  it  was  at  the  beginning  accompanied  by  fraud, 
stratagem,  and  frequently  by  violence.  It  was  not  strange, 
therefore,  and  seemed  to  cause  no  public  concern,  that  Mer- 
cury was  regarded  as  the  patron  deity  both  of  merchants  and 
of  thieves. 

At  the  beginning,  moreover,  merchants  were  persons  of 
great  note,  men  who  were  envied  and  feared,  ranking  higher 
than  artisans  or  farmers,  and  constituting  a  veritable  aristoc- 
racy. Trade  or  commerce  on  a  small  scale,  and  particularly 
retail  trade  such  as  exists  to-day,  is  of  comparatively  recent 
origin. 

In  the  evolution  of  trade  or  commerce  two  stages  may  be 
noted :  — 

(1)  The  first  stage  is  that  of  the  travelling  trader.     All  the 
countries  in  which  commerce  is  as  yet  little  developed  may  be 
regarded  as  still  in  this  stage ;  trade  is  carried  on  by  means 
of  caravans  and  travelling  bands.     This  condition  survives  in 
our  smaller  towns,  where  pedlers  and  hucksters  carry  their 
goods  about  in  quest  of  customers. 

But  the  system  of  itinerant  traders  is  impossible  except 
for  goods  that  can  be  easily  transported ;  it  is,  moreover,  a 
costly  method,  because  the  expenses  it  involves  are,  compared 
with  the  value  of  the  goods  and  the  amount  of  sales,  exceed- 
ingly high.  The  profits  of  traders  who  conduct  caravans 
across  Central  Africa  must  reach  at  least  four  hundred  per 
cent  in  order  to  be  regarded  as  worth  while. 

(2)  Therefore,  whenever   commerce  attains  any  develop- 


SERVICES   OF   MERCHANTS  203 

ment,  the  travelling  trader  soon  gives  way  to  the  sedentary 
trader  or  shopkeeper.  Formerly,  the  trader  sought  his  cus 
tomer;  now,  the  customer  must  find  the  trader.  But  the 
trader  endeavors  to  attract  the  attention  of  purchasers  by 
means  of  signs  (which  originally  were  of  the  same  nature  as 
the  barber's  pole  in  front  of  his  shop,  or  the  wooden  Indian 
that,  until  quite  recently,  stood  before  most  tobacco  shops)  ; 
or  show-windows,  exposing  to  view  the  goods  themselves  in 
the  most  enticing  arrangement ;  or  even  by  means  that  are 
designed  to  attract  customers  from  afar,  —  such  as  advertise- 
ments, circulars,  catalogues,  or  commercial  travellers.  These 
commercial  travellers,  or  "  drummers,"  differ  from  the  travel- 
ling traders  of  previous  epochs  in  that  they  carry  samples 
with  them  instead  of  the  goods  themselves. 

The  advantages  that  society  derives  from  the  existence  of 
traders  are  these  :  — 

(1)  They  serve  as  intermediaries,  or  middlemen,  between 
the  producer  and  the  consumer,  and  save  the  time  each  of 
them  would  be  required  to  waste  in  seeking  the  other. 

(2)  They  buy  goods   in   large    quantities,    i.e.  wholesale, 
from  the  producer,  and  sell  them  in  smaller  quantities,  i.e. 
retail,  to  the  consumer  or  smaller  dealer,  and  thus  obviate 
the  embarrassments  which  inevitably  would  result  from   a 
difference  between  the  quantity  offered  by  the  producer  and 
that  desired  by  the  consumer. 

(3)  They  keep  merchandise  in  stock,  and  thus  prevent  the 
difficulties  which  might  result  from  the  fact  that  the  producer 
rarely  wants  to  sell  goods  at  exactly  the  time  the  consumer 
wants  to  buy. 

These  are,  no  doubt,  important  services  rendered  by  mer 
chants  or  intermediaries,  but  we  must  inquire  how  much  they 
cost  to  society.  It  must  be  admitted  that  for  various  reasons, 
chief  among  which  is  the  small  amount  of  labor  involved  in 
trading  and  the  attraction  it  therefore  has  for  many  people, 
the  actual  number  of  middlemen,  and  of  retail  traders  (shop- 
keepers) in  particular,  has  far  exceeded  the  number  really 


204  PRINCIPLES    OF   POLITICAL    ECONOMY 

needed.  The  multiplication  of  middlemen  must  of  course 
result  in  a  proportionate  decrease  in  the  average  amount  of 
business  done  by  each  of  them.  Hence,  as  the  number  of 
sales  made  by  each  is  reduced,  the  price  of  each  article  is 
loaded  with  excessive  general  expenses,  and  it  often  happens 
that  although  the  wholesale  price  of  the  goods  sold  by  re- 
tailers falls  considerably,  there  is  no  corresponding  fall  in 
retail  prices.  In  this  wise,  middlemen  tend  to  become  veri- 
table social  parasites.1 

When  in  addition  to  this  we  consider  the  frequent  adul- 
teration of  goods,  which  has  recently  become  a  peril  to 
public  health,2  and  the  untruthful  advertisements  which 
are  also  a  result  of  keen  competition  among  tradesmen,  we 

1  As  it  is  difficult  to  obtain  figures  illustrative  of  the  growth  of  trading 
classes  in  this  country,  it  is  necessary  to  quote  the  French  statistics  on  this 
point. 

In  1866  the  number  of  traders  in  France  ("  commerQants")  was  858,312, 
and  in  1896  it  was  1,492,921.  This  is  an  increase  of  74  per  cent  in  thirty 
years.  If  this  rate  of  increase  should  continue,  the  whole  population  of 
France  would  be  traders  in  two  hundred  years. 

A  typical  example  of  the  increase  in  the  number  of  shopkeepers  in  France, 
and  one  frequently  quoted  by  French  economists,  is  that  of  bakers.  Thirty 
years  ago  there  was  in  Paris  one  bakery  for  every  1800  inhabitants.  To-day 
there  is  one  for  every  1300.  In  Lyons  there  is  one  for  every  500,  and  in 
St.  Etienne  one  for  every  380  of  the  population.  What  is  the  result? 
Bread  is  sold  at  a  price  40  per  cent  above  the  normal  cost  of  production, 
that  is,  above  the  price  for  which  cooperative  societies  sell  it.  For  bread 
alone,  the  useless  multiplicity  of  middlemen  costs  the  French  population 
sixty  to  eighty  million  dollars  per  annum  !  If  we  multiply  these  figures  by 
the  number  of  equally  important  articles  of  consumption  in  which  middlemen 
deal,  we  will  have  some  idea  of  the  enormous  tribute  which  a  nation  may  be 
obliged  to  pay  to  the  trading  classes.  The  total  amount  would  probably 
reach  twice  that  which  is  paid  to  the  government  in  taxes.  Socialists  and 
classical  economists  alike  condemn  this  defect  of  our  social  organization.  In 
1822  Fourier  .denounced  and  foretold,  with  a  vigor  and  an  exactitude  that 
have  never  been  surpassed,  the  abuses  to  which  our  social  organization  would 
give  rise  in  this  respect. 

Professor  Leroy-Beaulieu  has  given  an  interesting  discussion  of  this  sub- 
ject in  his  large  "  Economic  politique." 

2  Undoubtedly  the  adulteration  of  food,  false  weights,  and  deceit  in  com- 
merce are  not  exclusively  characteristic  of  our  own  times.     The  writings  of 


SUBSTITUTES   FOR   MIDDLEMEN  205 

must  ask  whether  the  services  rendered  by  these  intermedi- 
aries are  not  too  dearly  paid  nowadays,  and  whether  we 
cannot  devise  some  other  method  of  organizing  exchange  — 
a  method  that  will  be  less  costly  and  less  dangerous  for 
society. 

Clearly  the  most  effective  remedy  would  be  to  put  pro- 
ducers and  consumers  in  direct  relations  with  each  other, 
and  thus  dispense  with  middlemen,  or  at  least  reduce  their 
numbers  to  a  minimum.1 

The  great  difficulty  consists  in  the  fact  that  the  producer 
cannot  very  well  sell  at  retail,  in  small  quantities,  and  the 
consumer  is  even  less  able  to  purchase  wholesale.  The 
attempt  is  now  being  made  to  overcome  this  difficulty  by 
means  of  two  kinds  of  association;  namely,  the  association 
of  producers  who  agree  to  sell  to  the  public  directly  (for  ex- 
ample, agricultural  syndicates  such  as  are  mentioned  in  the 
footnote  on  page  168),  or  the  association  of  consumers  who 
agree  to  buy  directly  of  the  producers  (cooperative  societies 
for  consumption,  which  we  shall  describe  in  Book  V). 

Therefore  it  is  not  impossible  that  the  day  will  come  when 

the  prophets  of  Israel  are  full  of  imprecations  upon  the  merchants  of  Tyre 
and  Sidon.  The  mediaeval  guilds  also  found  it  necessary  to  forbid  these 
practices.  But  it  may  be  said  that  the  great  increase  in  the  number  of 
traders  has  aggravated  this  evil  by  obliging  middlemen  to  lower  prices  in  order 
to  attract  customers. 

The  adulteration  of  foods  has  become  so  serious  a  problem  that  most  coun- 
tries have  legislated  against  it.  Congress  has  recently  (December,  1902) 
passed  a  "pure  food  law"  defining  and  punishing  food  adulteration. 

1  Long  ago,  even  before  the  class  of  traders  had  originated,  producers  and 
consumers  met  together  at  the  markets  or  fairs  which  were  formerly  of  great 
importance,  and  which  still  are  found  in  rural  districts  or  sparsely  populated 
countries.  But  we  could  not  think  of  returning  to  such  a  system  as  that. 
It  would  be  more  costly  than  the  merchant  class,  because  of  the  loss  of  time 
and  the  cost  of  transportation.  Hence  fairs  and  markets  are  losing  their 
importance  nearly  everywhere.  Yet  in  countries  where  improved  methods 
of  exchange  are  unknown,  fairs  are  still  important ;  the  fair  of  Nijni-Novgo- 
rod,  in  the  extreme  eastern  part  of  Europe,  transacts  business  to  the  amount 
of  $80,000,000  annually,  and  brings  together  between  200,000  and  300,000 
people  from  all  parts  of  the  old  continent. 


206  PRINCIPLES  OF   POLITICAL   ECONOMY 

there  will  be  no  more  traders.  It  may  perhaps  seem  that 
such  a  change  would  be  tantamount  to  a  return  to  former 
conditions,  as  it  would  lead  us  back  to  the  primitive  system 
by  which  producers  and  consumers  exchange  directly.  But 
with  regard  to  such  apparent  retrogressions  as  this,  we  must 
refer  the  reader  to  what  will  be  said  later  concerning  money 
and  credit. 

VII.   The  Means  of  Transportation 

We  may  easily  conceive  of  exchange  without  the  displace- 
ment of  matter ;  for  instance,  when  we  exchange  immovable 
objects,  such  as  land  or  buildings,  or,  better  still,  when 
exchange  takes  the  form  of  pure  speculation  in  commodities. 
Nevertheless,  change  of  place  may  be  regarded  as  an  essential 
feature  of  that  particular  form  of  exchange  to  which  both 
custom  and  legal  phraseology  confine  the  name  of  commerce. 
Now  change  of  place,  or  transportation,  requires  labor,  and 
consequently  involves  cost.  Every  invention  which  facili- 
tates transportation  also  aids  exchange  ;  hence  the  history 
of  commerce  is  in  a  measure  identical  with  the  development 
of  transportation  on  land  and  on  sea. 

The  difficulties  of  transportation  are  of  various  kinds,  and 
due  to  several  conditions,  among  which  the  following  may 
be  distinguished  :  — 

(1)  Distance.  Man's  genius  cannot  do  away  with  dis- 
tance. He  cannot  reduce  the  space  that  separates  two  parts 
of  the  earth.  But  practically  the  obstacle  of  distance  is  con- 
verted into  one  of  time,  and  human  ingenuity  has  been  singu- 
larly successful  in  reducing  the  time  necessary  for  traversing 
a  given  distance.  The  first  stage  between  New  York  and 
Philadelphia,  set  up  in  1756,  made  the  run  in  three  days.  It 
was,  even  after  the  Revolution,  quite  an  achievement  to  make 
the  trip  between  New  York  and  Boston  in  six  days.1  It  is 

1  In  1766  it  was  announced  that  a  conveyance  described  as  the  Flying 
Machine,  "  being  a  good  wagon,  with  seats  on  springs,"  would  perform  the 
whole  journey  between  New  York  and  Philadelphia  in  the  surprisingly  short 


MEANS    OF   TRANSPORTATION  207 

no  exaggeration  to  say  that  we  can  now  travel  twenty  times 
as  fast  as  the  founders  of  the  nation ;  and  we  are  perfectly 
justified  in  saying,  therefore,  that  the  size  of  the  country  has 
been  reduced  to  one  four-hundredth  of  what  it  then  was 
(since  surfaces  vary  in  proportion  to  the  squares  of  the 
radii).  This  remarkable  change  has  been  brought  about  by 
railways  and  steamboats,  which  have  had  the  same  effect  as 
an  astounding  reduction  of  the  earth's  area. 

(2)  The  nature  of  commodities.  Cattle  are  not  so  easily 
transported  as  vegetables,  nor  vegetables  so  easily  as  coal,  nor 
coal  so  easily  as  gold.  Weight,  danger  of  injury  or  of  break- 
age, perishability  or  difficulty  of  preservation,  are  hindrances 
to  transportation.  But  they  may  be  partly  overcome  by 
rapidity  of  conveyance.  In  the  days  of  sailing  vessels,  cattle 
or  meat  could  not  have  been  sent  safely  from  America  to 
Europe.  This  can  be  done  to-day,  thanks  to  the  short  dura- 
tion of  the  trip.  Formerly,  it  was  impossible  to  send  fish, 
fresh  fruit,  or  game,  from  one  part  of  the  Union  to  another. 
Now  this  is  done  daily,  and  requires  but  a  few  hours. 
Besides  quick  conveyance,  several  recent  inventions  have 
helped  overcome  the  obstacles  in  the  way  of  transportation. 
Among  these  are  the  refrigerating  process  which  permits 

time  of  two  days.  In  his  recollections  of  the  revolutionary  period,  Samuel 
Breck  describes  how,  by  getting  up  at  three  or  four  o'clock  in  the  morning 
and  prolonging  the  journey  until  late  at  night,  he  used  to  make  the  trip  from 
New  York  to  Boston  in  six  days,  after  a  series  of  mishaps  and  accidents  such 
as  would  suffice  for  an  emigrant  train  crossing  the  plains. 

Ocean  travel  then  was  scarcely  known.  In  the  time  of  Washington  it 
was  no  uncommon  occurrence  when  a  vessel  was  nine,  ten,  or  eleven  weeks, 
or  even  three  months,  on  a  voyage  from  Havre  to  New  York.  In  1795,  and 
for  a  number  of  years  after,  a  man  who  had  been  abroad  was  pointed  out  in 
the  streets  of  even  large  cities.  (See  McMaster,  "  History  of  the  People  of 
the  United  States,"  Vol.  I,  Chapter  1.) 

Comparing  present  conditions  of  passenger  transportation  with  those 
above  described,  we  find  that  the  trip  from  New  York  to  Philadelphia  is  now 
made  by  express  trains  in  about  two  hours,  and  from  New  York  to  Boston 
in  less  than  seven  hours.  The  time  required  a  hundred  years  ago  to  travel 
from  Boston  to  New  York  is  now  sufficient  to  go  from  the  Atlantic  to  the 
Pacific  coast. 


208  PRINCIPLES   OF   POLITICAL   ECONOMY 

the  exportation  of  fresh  meat  from  Australia  to  Europe  ; 
chemical  processes  used  for  the  preservation  of  food;  and 
perfected  methods  of  canning.  In  spite  of  all  these  improve- 
ments, however,  the  difficulty  of  transporting  certain  objects, 
particularly  meat,  even  now  has  economic  consequences  that 
are  important  and  sometimes  disastrous. 

(3)  The  nature  and  condition  of  roads.  This  is  the  most 
serious  obstacle  of  all;  but  it  is  also  the  one  that  human 
industry  has  coped  with  most  successfully. 

By  sea,  there  is  no  need  to  build  a  road ;  the  sea  will  bear 
any  weight,  and  the  horizontal  level  permits  of  motion  in 
any  direction.  The  weakest  motive  force,  and,  if  we  use  the 
wind,  a  gratuitous  one,  is  sufficient  to  propel  enormous 
masses.  It  is  not  surprising,  therefore,  that  the  sea  has 
always  been  the  highroad  of  commerce,  and  that  countries 
separated  by  a  thousand  miles  of  sea  are  really  nearer  than 
others  divided  by  a  hundred  miles  of  land.1  Even  now, 
despite  the  wonderful  progress  of  overland  carriage,  trans- 
portation by  water  is  much  less  difficult  and  costly  than 
transportation  by  land,  i.e.  it  requires  less  labor.2 

On   land,  the    difficulties  are  greater.     The  broken  and 

1  More  freight  is  carried  between  different  countries  by  water  than  by 
land  ;  in  some  countries,  as  in  Russia  and  China,  more  is  carried  by  water 
than  by  land  even  within  the  borders  of  the  nation.     As  the  saving  of  time 
is  of  great  moment  in  transportation,  steam  has  usually  superseded  sails  in 
transportation  over  waterways. 

Columbus,  in  1492,  was  seventy  days  in  crossing  the  Atlantic  from  Spain 
to  the  Bahamas;  modern  ocean  "greyhounds"  have  reduced  the  record 
between  Sandy  Hook  and  Queenstown  to  less  than  five  and  a  half  days. 
Goods  are  often  placed  on  the  shelves  of  Chicago  stores  within  ten  days  after 
leaving  France. 

2  Larger  ships  and  better  machinery  have  reduced  freight  rates  for  trans- 
portation by  water,  and  thus  increased  the  natural  advantage  of  economy. 
One  pound  of  coal  now  supplies  nearly  three  times  as  much  steam-power  as 
in  1875.    A  bushel  of  wheat  is  delivered  at  Liverpool  from  the  North  Dakota 
wheat-fields  at  a  little  over  twenty  cents.     At  Marseilles  the  English  coal 
which  has  come  through  the  Strait  of   Gibraltar  and  has  travelled  nearly 
2000  miles,  is  sold  cheaper  than  the  coal  from  the  Grand-Combe  mines  (in 
France),  which  are  only  110  miles  off. 


KOADS  209 

uneven  surface  of  our  planet  scarcely  permits  transporting 
goods  without  artificial  roads.1  Carriage  by  men  (as  is  usual 
in  Africa),  or  by  beasts  of  burden  (as  in  Central  Asia),  can, 
if  necessary,  dispense  with  the  need  for  roads ;  but  transpor- 
tation by  means  of  vehicles  cannot.  Now  road-building  is 
a  costly  matter,  and  the  better  the  road  the  more  it  costs. 
Railroads  are  the  most  perfect  roads  for  their  purpose,  but 
they  are  exceedingly  expensive.  In  Europe  the  average  cost 
of  railroads,  including  equipment,  is  about  $  115,000  per  mile  ; 
but  it  varies  greatly,  according  to  the  natural  obstacles  that 
must  be  overcome  and  the  cost  of  labor  and  material  employed 
in  construction.  The  average  cost  per  mile  for  road  and 
equipment  in  the  United  States  is  about  §50,000,  in  Germany 
it  is  about  $120,000,  in  France  $130,000,  and  in  England 
considerably  more.  Even  where  a  railroad  can  be  built  at 
the  least  cost,  about  $20,000  per  mile  must  be  expended.2 
Therefore  the  construction  of  railroads  requires  an  enormous 
amount  of  capital,  on  which  interest  must  be  paid  by  the 

1  Improvement  in  the  means  of  transportation  is  illustrated  by  a  multi- 
tude of  modern  contrivances  :    macadamized  roads,  railways,  bridges,  tun- 
nels, regular  sea  routes  which  best  utilize  winds  and  currents,  canals,  the 
wonderful  invention  of  the  wheel,  steel  vessels,  steam-engines,  and  locomo- 
tives.    All  these  improvements  and  devices  may  be  classified  under  three 
heads  :  those  that  concern  the  road  or  route  ;  those  that  concern  the  vehicle 
employed  ;  and  those  that  concern  the  motive  power  used. 

2  The  railroad  mileage  of  the  world  at  the  end  of  1900,  according  to  the 
"  Archiv  fur  Eisenbahnwesen,"  was  490,962,  costing  nearly  $39,000,000,000  ; 
whereas  in  1830  there  were  less  than  800  miles.     The  United  States,  which 
in  1870  had  little  over  50,000  miles,  now  possesses  nearly  200,000,  i.e.  more 
than  two-fifths  of  the  world's  mileage  and  more  than  all  of  Europe.    Over 
1,400,000  freight  cars  and   27,000  passenger  cars  are  now  running  on  the 
railroads  of  this  country,  which  employ  over  a  million  persons,  and  whose 
net  annual  earnings  are  over  $500,000,000. 

According  to  the  report  of  the  United  States  Commissioner  of  Navigation  for 
1901,  the  world's  merchant  marine  includes  40,556  vessels  with  a  total  ton- 
nage of  31,498,847.  This  calculation  included  only  steamers  of  over  100 
net  tons  and  sailing  vessels  of  over  50  net  tons ;  of  the  total  thus  obtained 
12,702  were  steamers  with  a  total  gross  tonnage  of  23,379,726. 

Besides  the  means  of  transportation,  it  is  interesting  to  note  the  develop- 
ment of  telegraphy,  which  is  scarcely  less  indispensable  to  modern  exchange. 


210  PRINCIPLES   OF   POLITICAL   ECONOMY 

transporters  of  goods  and  by  passengers.  Nevertheless,  if 
there  is  sufficient  traffic,  there  is  great  economy  in  transpor- 
tation by  rail,  to  say  nothing  of  its  regularity,  convenience, 
and  rapidity. 

The  cost  of  transportation  by  wagon  varies  from  6  to  10 
cents  per  mile  for  hauling  a  ton  of  freight  over  the  best 
roads,  and  is  as  high  as  25  cents  or  more  over  very  poor 
roads.  The  average  price  per  ton  for  a  mile  of  carriage  on 
the  trunk  railroads  of  the  United  States  has  declined  in 
the  past  thirty  years  from  about  2  cents  to  6  mills,  and 
on  two  of  them  to  3.6  mills.1  These  comparatively  low 
rates  are  not  surprising  when  we  reflect  that  to  do  the  work 
of  a  locomotive  attached  to  a  freight  train,  we  should  require 
on  an  ordinary  road  at  least  three  hundred  horses,  and  that 
they  would  travel  ten  times  more  slowly. 

VIII.  The  Division  of  Barter  into  Sale  and  Purchase 

When  exchange  is  carried  on  directly,  commodity  for 
commodity,  it  is  called  barter.  But  it  is  an  inconvenient 
and  almost  impracticable  operation.  In  fact,  for  barter  to  be 
successfully  effected,  A,  the  possessor  of  an  object,  must  find 
some  other  person,  B,  who  wants  to  obtain  that  object,  and 
who  possesses  and  is  disposed  to  yield  the  very  object  desired 
by  A.  Nor  is  this  all.  Even  if  these  two  persons  actually 
find  each  other,  they  must  have  two  exchangeable  objects  of 
equal  value,  i.e.  objects  which  correspond  to  equal  and  inverse 
desires.  It  is  easy  to  see  that  all  these  conditions  are  but 
rarely  fulfilled.2 

According  to  R.  E.  May  (  "  Die  Wirthschaf t  in  Vergangenheit,  Gegenwart  und 
Zukunft,"  Berlin,  1901)  the  world's  telegraphic  lines  measure  over  two  million 
miles,  i.e.  eighty  times  the  earth's  circumference.  The  number  of  messages 
transmitted  in  the  United  States  in  1902  was  about  90,000,000. 

1  The  average  rates  on  the  New  York  canals  have  declined  from  6.5  mills 
per  ton  mile  to  1.9  mills.     The  present  average  canal  rates  are  one-third  that 
of  most  railroads.     The  average  cost  of  transportation  on  the  Great  Lakes  is 
about  .6  mill  per  ton  mile,  and  on  the  largest  ocean  freighters  about  .5. 

2  Lieutenant  Cameron  tells  what  trouble  he  had  in  buying  a  boat  when 


SALE   AND   PURCHASE  211 

The  invention  of  a  third  commodity  to  serve  as  a  go-between 
removes  the  difficulties  encountered  by  barter.  It  evidently 
involves  an  express  or  tacit  understanding,  among  men  living 
in  society,  by  which  each  person  agrees  to  accept  this  third 
commodity  in  exchange  for  his  goods.  Once  this  under- 
standing is  reached,  exchange  transactions  are  readily  effected. 
Suppose  that  silver  be  selected  as  the  commonly  accepted 
third  commodity  in  all  exchanges.  Then,  for  the  commodity 
that  I  have  produced  and  wish  to  dispose  of,  I  will  accept 
a  certain  amount  of  silver,  although  I  may  have  no  use  for 
it.  I  do  this  because  I  know  that  when  I  wish  to  acquire 
anything  I  want,  all  I  shall  have  to  do  is  to  offer  its  pos- 
sessor a  certain  amount  of  silver;  he  will  accept  this  silver 
for  the  same  reasons  that  led  me  to  accept  it. 

It  is  evident,  then,  that  every  exchange  transaction  can  be 
divided  into  two  separate  and  distinct  operations.  Instead 
of  exchanging  my  commodity  A  for  your  commodity  B,  I 
exchange  A  for  silver  and  then  exchange  this  silver  for  B. 
The  first  of  these  exchange  operations  is  called  sale,  and  the 
second,  purchase,  —  at  least  whenever  the  intermediary  com- 
modity is  money  properly  so  called.  We  appear,  therefore, 
to  have  complicated  rather  than  simplified  exchange,  inasmuch 
as  two  operations  are  now  necessary  instead  of  only  one. 
But  a  straight  line  is  not  always  the  shortest  road  between 
two  points.  This  ingenious  roundabout  method  does  away 
with  an  incalculable  amount  of  trouble  and  loss  of  time. 

Barter,  as  we  have  explained,  is  made  impracticable  by  sev- 
eral circumstances.  It  requires,  as  we  have  already  pointed 
out,  that  the  producer,  A,  shall  meet  some  other  person,  B, 

travelling  in  Africa:  "  Syde's  agent  wished  to  be  paid  in  ivory,  of  which 
I  had  none ;  but  I  found  that  Mohammed  Ibn  Salib  had  ivory  and  wanted 
cloth.  Still,  as  I  had  no  cloth,  this  did  not  assist  me  greatly  until  I  heard 
that  Mohammed  Ibn  Gharib  had  cloth  and  wanted  wire.  This  I  fortunately 
possessed.  So  I  gave  Ibn  Gharib  the  requisite  amount  in  wire ;  whereupon 
he  handed  over  cloth  to  Ibn  Salib,  who  in  his  turn  gave  Syde's  agent  the 
wished-for  ivory.  Then  he  allowed  me  to  have  the  boat."  —  VERNE Y  L. 
CAMERON,  "All  Across  Africa,"  Vol.  I. 


212  PRINCIPLES   OF   POLITICAL   ECONOMY 

who  is  inclined  to  acquire  at  once  the  particular  object  that 
A  has  to  dispose  of;  it  is  necessary,  furthermore,  that  B 
shall  possess,  and  be  willing  to  relinquish,  the  very  object 
that  A  seeks  to  obtain.  But  with  money  as  the  medium  of 
exchange,  the  producer  A,  although  he  has  still  to  find  some 
one  who  wants  his  commodity,  no  longer  requires  the  pur- 
chaser to  offer  the  commodity  that  he,  A,  wants.  A  will 
obtain  from  some  other  person,  at  some  other  time  and  place, 
the  commodity  that  he  wants.  It  is  the  inseparability  of 
these  two  operations  in  barter  that  made  them  very  diffi- 
cult ;  but  when  the  tie  that  unites  them  is  broken,  each  of 
them  separately  becomes  comparatively  simple..  It  is  not 
very  difficult  to  find  a  buyer,  i.e.  some  one  who  wants  your 
commodity.  It  is  even  less  difficult  to  find  some  one  who  is 
willing  to  sell  you  the  commodity  you  want. 

But  we  must  not  forget  that  although  these  processes  are 
henceforth  separated,  they  nevertheless  continue  to  form  a 
whole,  and  that  the  one  cannot  be  conceived  without  the 
other.  In  our  everyday  life  we  are  too  apt  to  imagine 
that  sale  and  purchase  are  independent  and  self-sufficient 
processes.  That  is  a  mistake.  Every  purchase  means  a 
prior  sale  ;  for  before  being  able  to  exchange  money  for  goods 
we  must  previously  have  exchanged  goods  for  money.  In- 
versely, every  sale  points  to  a  future  purchase  ;  for  if  we  ex- 
change goods  for  money,  we  do  so  only  in  order  that  we  may 
have  this  money  to  exchange  for  other  goods.  What  else 
could  we  do  with  it?  Still,  as  money  can  be  kept  for  an  in- 
definite period  without  being  used,  a  long  interval  may  elapse, 
—  perhaps  several  years  or  even  several  generations,  —  be- 
tween the  sale  and  the  complementary  purchase.  But  in 
thought  these  two  operations  must  be  connected.  Despite  the 
interposition  of  a  medium  of  exchange  and  the  complication 
it  introduces,  every  man  in  modern  as  well  as  in  primitive 
society  lives  by  exchanging  his  products  or  services  for  the 
products  or  services  of  others. 


CHAPTER  II  — METALLIC   MONEY 
I.    The  History  of  Money 

THE  function  of  medium  of  exchange  has  not  been  assigned 
to  any  particular  object  by  the  terms  of  an  express  agreement 
among  men,  but  because  certain  objects  forced  themselves 
upon  men's  choice  by  reason  of  the  peculiar  qualities  which 
fitted  them  for  this  important  service. 

The  difficulties  of  barter  (see  page  210)  obliged  men  to 
choose  an  intermediary  commodity  to  play  a  part  in  every 
exchange.  They  naturally  chose  a  commodity  that  was 
familiar  to  them,  and  that  they  regarded  as  most  generally 
useful.  For  primitive  societies  the  most  universally  useful 
commodities  were  probably  rude  implements  of  hewn  stone. 
In  patriarchal  societies  cattle  appear  to  have  been  the  cur- 
rent "  money  "  or  intermediary  commodity.  Indeed,  many 
Indo-European  languages  use  the  same  term  to  designate 
cattle  and  money.1 

According  to  circumstances,  many  other  commodities  have 
served  as  the  medium  of  exchange ;  for  example,  rice  in 
Japan,  packages  of  tea  in  Central  Asia,  furs  in  the  Hudson 
Bay  territory,  salt  and  colored  calico  in  Central  Africa.  But 
one  class  of  objects,  viz.,  the  metals  gold,  silver,  and  copper, 
from  early  times  attracted  man's  attention  in  all  civilized 
societies,  and  soon  took  the  place  of  every  other  commodity 
as  a  suitable  intermediary  in  exchange. 

By  virtue  of  chemical  properties  which  make  these  metals 
comparatively  unchangeable,  they  are  furnished  by  nature  in 

1  The  most  familiar  instance  of  this  is  the  Latin  word  pecunia,  which 
originally  meant  cattle  or  herd.  Even  in  Homer  values  are  estimated  in 
"oxen." 

213 


214  PRINCIPLES    OF    POLITICAL    ECONOMY 

a  relatively  pure  state,  —  gold  purer  than  silver,  and  silver 
purer  than  copper.  Hence  they  were  known  and  used  long 
before  a  knowledge  of  metallurgy  enabled  men  to  use  other 
metals,  such  as  iron.  It  is  a  singular  coincidence  that  the 
old  legend  of  the  four  ages  of  mankind,  —  the  ages  of  Gold, 
Silver,  Bronze,  and  Iron, — places  these  four  metals  precisely 
in  the  order  in  which  man  must  have  become  familiar  with 
them.  The  physical  properties  of  gold  and  silver,  —  lustre, 
bright  color,  malleability,  etc.,  —  which  are  by  no  means  com- 
mon and  which  soon  led  men  to  seek  them  either  for  orna- 
ment or  for  industrial  purposes,  easily  account  for  the 
important  part  they  have  played  at  all  times  and  among  all 
peoples. 

These  natural  properties  involve  economic  consequences  of 
the  greatest  importance,  which  give  the  precious  metals  a 
marked  superiority  over  all  other  commodities.  These  prop- 
erties are :  — 

(1)  Facility  of  transportation.  No  other  objects  have  so 
great  a  value  in  so  small  a  weight.  A  man  cannot  con- 
veniently carry  on  his  back  more  than  sixty  pounds.  Now 
sixty  pounds  of  coal  are  worth  less  than  20  cents ;  the  same 
weight  of  wheat  is  worth  about  60  cents ;  of  refined  sugar, 
$2;  of  cotton,  $4  ;  of  copper,  $8 ;  of  ivory,  $130  to  $150; 
of  raw  silk,  $250 ;  of  silver,  $500  ;  of  fine  gold,  $18,000. 

The  importance  of  this  quality  of  precious  metals  is  much 
greater  than  at  first  sight  appears.  It  is  plain  that  if  we 
could  do  away  with  the  difficulty  of  transportation  for  any 
commodity,  if  a  mere  word  could  transfer  it  instantaneously 
from  one  place  to  another,  and  if,  therefore,  the  whole  world 
formed  but  one  market  for  this  commodity,  the  result  would 
be  that  its  value  would  everywhere  be  exactly  the  same. 
(See  page  207.)  Suppose  for  a  moment  that  its  value 
were  lower  in  one  place  than  in  another.  Then  it  would 
immediately  be  transported  from  the  first  to  the  second 
place ;  and  as  transportation,  according  to  our  hypothesis, 
offers  no  difficulty  and  no  expense,  the  slightest  difference 


HISTORY   OF   MONEY  215 

would  suffice  to  make  transportation  profitable.  Hence  the 
difference  of  value  supposed  to  exist  could  not  continue ;  the 
original  equilibrium  would  be  reestablished  at  once,  just  as 
water,  whenever  it  has  been  agitated,  immediately  seeks  its 
lowest  level. 

Now  as  precious  metals  are  of  all  commodities,  except 
precious  stones,  those  which  have  the  greatest  value  in  the 
smallest  volume,  they  are  also  the  commodities  that  may 
most  easily  be  transported;  their  value,  therefore,  most 
rapidly  tends  to  become  uniform.  For  1  per  cent  of  its 
value  (freight  and  insurance  included)  gold  or  silver  can  be 
conveyed  from  England  to  a  Chinese  port,  whereas  the 
transportation  of  the  same  weight  of  wheat  would  cost, 
according  to  the  distance,  20,  30,  or  even  50  per  cent  of  its 
value.  It  might  seem  to  follow  that,  except  for  this  one 
per  cent,  the  value  of  the  precious  metals  must  be  the  same 
the  world  over.  Yet  such  a  conclusion  is  erroneous ;  for  the 
value  of  the  precious  metals  is  in  fact  not  the  same  every- 
where. In  mining  districts,  where  these  metals  are  produced, 
their  value  is  somewhat  lower  than  elsewhere.  This  explains 
the  incredibly  high  prices  formerly  charged  for  goods  in  Cali- 
fornia, and  now  paid  in  the  Transvaal.  Nevertheless,  we 
may  say  that  the  value  of  these  metals  satisfies  fairly  well 
the  first  condition  of  a  good  measure  of  values,  viz.,  invaria- 
bility from  place  to  place. 

(2)  Unlimited  durability.  By  virtue  of  chemical  proper- 
ties that  make  rusting,  decay,  corrosion,  or  disintegration 
impossible,  gold  and  silver  may  be  kept  unchanged  for  an 
indefinite  period.  No  other  wealth  is  so  durable.  Animal 
and  vegetable  products  decay,  and  even  some  metals,  such  as 
iron,  oxidize  and  crumble  into  dust. 

This  characteristic  is  almost  as  important  as  the  first.  It 
has  the  same  effect  with  regard  to  time  as  the  preceding  has 
with  regard  to  place,  inasmuch  as  it  insures  at  least  a  rela- 
tive invariability  of  value  from  one  period  to  another.  Be- 
cause of  this  durability,  by  virtue  of  which  the  same  molecules 


216  PRINCIPLES    OF    POLITICAL    ECONOMY 

of  metal  may  be  coined  and  recoined,  and  thus  last  century 
after  century,  the  precious  metals  are  little  by  little  accumu- 
lated in  large  quantities.  The  annual  production  of  these 
metals,  compared  with  the  immense  permanent  accumula- 
tion of  gold  and  silver,  is  as  unimportant  as  a  river  compared 
with  the  ocean.  As  the  accumulation  increases,  accidental 
variations  in  the  annual  production  of  gold  and  silver  make 
less  perceptible  differences  in  the  total  amount.  Any  sudden 
increase  in  the  volume  of  a  river  which  runs  into  a  small  lake 
causes  a  considerable  rise  in  the  level  of  the  lake ;  but  the 
highest  tides  of  the  Rhone  River,  for  example,  raise  the  level 
of  Lake  Geneva  only  a  few  inches. 

How  different  from  the  precious  metals  is  wheat !  It  is 
not  durable,  and  can  be  used  only  once.  When  each  annual 
harvest  takes  place,  the  barns  in  which  last  year's  crop  was 
stored  are  already  nearly  empty.  If  the  wheat  crop  in  a  par- 
ticular year  were  doubled  throughout  the  world,  the  large 
supply  would  cause  a  calamitous  fall  in  prices.  But  if  the 
output  of  our  gold  and  silver  mines  were  doubled  in  any  one 
year,  the  effect  would  be  trifling,  because  the  annual  product 
represents  such  a  small  fraction  of  the  total  existing  supply. 
Yet  variations  in  the  output  of  precious  metals  may  in  the 
long  run  become  perceptible.  If  the  rate  of  annual  increase 
were  5  per  cent  of  the  supply,  the  stock  of  gold  and  silver 
would  be  doubled  in  about  fifteen  years.  Therefore,  although 
the  value  of  these  metals  offers  a  satisfactory  guarantee  of 
stability  when  only  short  periods  of  time  are  taken  into  con- 
sideration, it  is  far  less  satisfactory  when  we  consider  longer 
periods.  This  variability  gives  rise  to  some  of  the  grave 
disadvantages  which  we  have  already  pointed  out- 

(3)  Identity  of  quality.  As  the  precious  metals  are  what 
the  chemists  call  elements,  they  are  always  identical ;  that  is 
to  say,  one  piece  of  pure  gold  is  like  every  other  piece  of 
pure  gold.  An  experienced  merchant  can  distinguish  Odessa 
wheat  from  California  wheat,  or  a  tuft  of  Australian  wool 
from  wool  grown  on  a  Spanish  merino ;  but  the  most  skilful 


HISTORY    OF   MONEY  217 

goldsmith,  with  the  aid  of  the  most  powerful  reagents,  can 
find  no  difference  between  Australian  gold  and  gold  from 
the  Ural  Mountains.  There  is  no  need  for  "samples"  of 
gold. 

(4)  Difficulty  of  counterfeiting.     The  precious  metals,  be- 
cause of  their  characteristic  color,  weight,  and  metallic  ring, 
may  be  recognized  by  the  way  they  look,  the  way  they  feel, 
and  the  way  they  sound ;  no  other  substances  are  likely  to  be 
mistaken  for  them. 

(5)  Perfect  divisibility.    By  divisibility  we  do  not  mean  sim- 
ply the  property  of  being  readily  drawn  into  threads  or  beaten 
into  thin  sheets,  —  for  gold  and  silver  are  wonderfully  ductile 
and  malleable, — but  economic  divisibility  as  well.    Dividing 
an  ingot  into  a  hundred  parts  does  not  alter  its  value  in  the 
least ;  the  value  of  each  fragment  is  exactly  proportionate  to 
its  weight,  and  the  value  of  all  the  fragments  put  together  is 
exactly  that  of  the  original  ingot.1 

To  use  the  precious  metals  as  an  instrument  of  exchange  is 
one  thing;  to  employ  them  as  money,  in  the  strict  sense  of 
the  term,  is  another.2  The  use  of  the  precious  metals  as 
money  has  an  interesting  history,  extending  through  several 
distinct  stages :  — 

(a)  First  the  precious  metals  were  used  in  the  shape  of 
crude  ingots.  In  every  exchange  transaction  these  ingots 

1  Precious  stones  are  superior  to  the  precious  metals  in  the  first  of  the 
above  requirements,  viz. ,  great  value  in  small  bulk,  but  in  all  the  other  re- 
quirements they  are  inferior  :  they  are  by  no  means  uniform  in  quality,  they 
can  be  successfully  imitated,  and  they  cannot  be  divided  without  losing  a 
large  part  of  their  value. 

Jevons,  in  his  classical  little  book  on  "  Money  and  the  Mechanism  of  Ex- 
change," enumerates  seven  qualities  which  the  material  of  money  should 
possess  :  1,  Utility  and  value  ;  2,  Portability ;  3,  Indestructibility  ;  4,  Homo- 
geneity ;  5,  Divisibility ;  6,  Stability  of  value  ;  7,  Cognizability. 

2  In  the  first  chapter  of  his  "  Monnaies  et  Me"dailles,"  Lenormant  says: 
"  Great  and  powerful  empires  like  those  of  Egypt,  Chaldsea,  and  Assyria, 
passed  thousands  of  years  in  wealth  and  prosperity,  with  as  extensive  com- 
mercial relations  as  any  nation  of  antiquity  ;  they  constantly  employed  the 
precious  metals  in  business,  but  were  absolutely  ignorant  of  their  use  as 


218  PRINCIPLES   OF   POLITICAL   ECONOMY 

had  to  be  weighed  and  assayed.  The  legal  forms  of  ancient 
Roman  law,  such  as  mancipatio  and  libripens,  remind  us  of 
the  days  when  the  instrument  of  exchange,  whether  silver  or 
bronze,  had  to  be  weighed.  Even  now  in  China,  where 
coined  money  is  not  in  use,  merchants  carry  their  scales  and 
touch-stones  with  them. 

(&)  The  inconvenience  of  being  required  to  weigh  and 
assay  metals  every  time  they  made  an  exchange  led  men  to 
conceive  the  idea  of  using  cut  ingots,  the  weight  and 
standard  of  which  were  fixed  beforehand  and  guaranteed  by 
some  official  seal  or  stamp.  The  legislator  who  first  conceived 
this  ingenious  idea  may  justly  boast  of  having  really  invented 
money.  The  pieces  of  metal  used  in  exchange  may  properly 
be  called  coined  money  when  they  are  not  weighed,  but 
counted.  It  seems  probable  that  the  first  money  was  coined 
between  700  and  650  B.C.  by  a  king  of  Lydia,  a  successor  of 
Gyges.  Specimens  of  this  money  may  be  seen  in  the 
British  Museum.  It  is  neither  of  gold  or  silver,  but  an  alloy 
of  the  two  metals,  known  to  the  Greeks  as  "  electrum."  It 
is  not  disk-shaped,  but  formed  like  a  bean,  and  bears  only 
the  traces  of  a  few  scratches  and  three  indentations.  Some- 
what similar  money  is  nowadays  used  in  China,  where  the 
pieces  of  metal  frequently  bear  the  trademark  of  business 
houses  supposed  to  certify  to  their  weight  and  degree  of 
purity. 

(c)  Still  another  step  had  to  be  taken.  The  cubical  or 
the  irregularly  shaped  piece  of  metal  was  inconvenient,  and 
in  spite  of  the  stamp  impressed  on  it  with  a  view  to  guar- 
anteeing its  weight  and  purity,  nothing  was  easier  than  to 
"  clip  "  it  without  leaving  any  traces  of  this  debasement  of 
its  value.  It  was  still  advisable  always  to  weigh  it  and  thus 
make  sure  of  its  real  value.  To  remove  this  and  other  practi- 
cal difficulties,  men  have  adopted  the  form  of  coined  money 
that  is  now  thoroughly  familiar  to  all  civilized  nations,  i.e. 
small  disks  covered  on  both  surfaces  and  on  the  edges  with 
relief  impressions,  so  that  any  tampering  destroys  the  design. 


IS    MONEY  EXCEPTIONAL   WEALTH?  219 

Once  adopted,  this  type  of  money  underwent  but  little  modifica- 
tion. To  describe  it  we  may  make  use  of  the  definition  given 
by  Professor  Jevons,  "  Coins  are  ingots  of  which  the  weight 
and  fineness  are  guaranteed  by  the  government,  and  certified 
by  the  integrity  of  designs  impressed  on  the  surfaces  of  the 
metal." 

II.   Is  Money  a  Superior  Kind  of  Wealth? 

The  popular  answer  to  this  question  admits  of  no  doubt. 
At  all  epochs  and  in  all  places,  except  among  savages,  money 
has  occupied  an  exceptional  place  in  the  thoughts  and  desires 
of  men.  They  regard  it,  if  not  as  the  only  wealth,  at  any  rate 
as  by  far  the  most  important  wealth.  Indeed,  they  appear 
to  measure  the  value  of  all  other  wealth  by  the  quantity 
of  money  that  can  be  obtained  in  exchange  for  it.  To  be 
rich  is  to  possess  either  a  large  amount  of  money  or  the 
means  of  obtaining  it  in  exchange  for  other  goods. 

It  would  be  interesting  to  trace  through  history  the  various 
manifestations  of  the  idea  that  confounds  gold  with  wealth. 
The  mediaeval  alchemists  attempted  to  transmute  the  baser 
metals  into  gold  and  thus  accomplish  what  they  called  the 
magnum  opus;  had  they  succeeded,  the  result  would  have 
been  far  less  important  as  a  chemical  discovery  than  as  an 
economic  revolution.  In  later  times,  we  mark  the  enthusiasm 
kindled  in  the  Old  World  by  the  arrival  of  the  first  gold- 
laden  galleons  from  America,  and  the  subsequent  belief  that 
in  the  new  Eldorado  an  end  would  be  found  for  all  human 
misery.  A  similar  idea  underlay  the  complicated  systems 
introduced  by  most  European  governments  in  the  sixteenth 
and  seventeenth  centuries  to  cause  the  influx  of  money 
into  the  countries  that  had  none,  and  prevent  its  exportation 
from  those  that  were  well  provided  with  it.  Even  to-day, 
the  anxiety  with  which  statesmen  and  financiers  watch  the 
exportation  and  importation  of  coin,  caused  by  variations  in 
the  imports  and  exports  of  goods,  is  fundamentally  due  to 
the  same  conception  of  the  importance  of  money. 


220  PRINCIPLES   OF   POLITICAL   ECONOMY 

But  if  we  ask  the  economists  whether  or  not  money  is  a 
superior  kind  of  wealth,  the  answer  will  be  entirely  different 
from  the  popular  opinion.  In  fact,  the  first  impetus  to  the 
growth  of  a  scientific  political  economy  was  the  protest 
against  the  popular  conception  of  money,  regarded  by  the 
earliest  economists  as  a  mere  prejudice.  The  science  had 
scarcely  been  founded  when  Boisguillebert,  in  1697,  declared, 
"  It  is  quite  certain  that  money  is  not  a  good  of  itself,  and 
that  its  quantity  has  nothing  to  do  with  the  opulence  of  a 
country."  Since  then  economists  have  shown  little  concern 
about  the  amount  of  money,  and  maintained  that  it  is  a 
commodity  like  all  other  commodities,  and  even  inferior  to 
others  because  it  is  in  itself  incapable  of  satisfying  any  want 
directly,  or  of  affording  any  pleasure  ;  it  is  consequently  the  only 
commodity  of  which  we  may  say  that  its  abundance  or  scarcity 
is  a  matter  of  perfect  indifference.  If  there  are  few  pieces  of 
money  in  a  country,  each  one  will  have  a  greater  purchasing 
power ;  if  there  are  many,  the  purchasing  power  of  each  will 
be  smaller.  So  what  does  the  quantity  matter  ? 

These  two  opinions,  however  contradictory  they  seem,  may 
easily  be  reconciled.  The  public  is  right  from  the  individual 
point  of  view  —  the  only  one  which  interests  it ;  economists 
are  right  from  the  general  or  social  point  of  view.  The  dis- 
tinction here  involved  requires  some  explanation. 

Every  piece  of  money  must  be  regarded  as  a  ticket  or  order, 
drawn  on  the  sum-total  of  existing  wealth,  giving  the  bearer 
the  right  to  claim  a  part  of  this  wealth  not  exceeding  the 
value  indicated  on  the  coin.1  It  is  clearly  our  individual  in- 

1  Coins,  however,  represent  orders  or  tickets  that  are  superior  to  ordinary 
credit  instruments  for  the  reason  that  they  carry  their  own  guaranty  with  them, 
inasmuch  as  the  value  of  coins  is,  in  part  at  least,  assured  by  the  value  of  the 
metal  contained  in  them.  "  If  you  know  how  to  read,"  says  Bastiat,  "  with 
the  eyes  of  the  mind,  the  inscription  which  a  coin  bears,  you  will  clearly  dis- 
tinguish the  words  :  Give  to  the  bearer  a  service  equivalent  to  that  which  he 
has  given  to  society,  a  value  that  is  disclosed,  proved,  and  measured  by  that 
which  I  myself  contain."  We  must  add  that  we  cannot  without  some  re- 
striction accept  the  optimistic  postulate  that  every  piece  of  money  repre- 
sents a  service  rendered  by  its  owner. 


IS   MONEY   EXCEPTIONAL   WEALTH?  221 

terest  to  possess  as  many  of  these  "  orders  "  as  possible ;  the 
more  we  have  the  richer  we  are.  We  know  very  well  that, 
in  themselves,  these  "  orders  "  can  neither  satisfy  hunger  nor 
slake  thirst.  Long  before  economists  had  pointed  out  this 
truth,  legend  taught  the  same  principle  in  the  tale  of  King 
Midas,  who  died  of  hunger  although  surrounded  by  wealth 
which  his  own  folly  had  turned  into  gold.  Nevertheless,  we 
regard  these  "  orders  "  as  far  more  convenient  than  any  other 
kind  of  wealth,  and  we  are  right  in  doing  so. 

Given  the  present  organization  of  society,  the  person  who 
desires  to  obtain  an  object  that  he  has  not  produced  (and  the 
immense  majority  of  people  are  thus  situated)  can  get  it  only 
by  means  of  two  operations :  first,  by  exchanging  the  product 
of  his  labor,  or  his  labor  itself,  for  money ;  second,  by  exchang- 
ing this  money  for  the  object  desired.  These  two  operations 
are  called  selling  and  buying.  The  second  of  them,  purchase, 
is  very  simple ;  by  means  of  money  a  desired  object  may  easily 
be  obtained.  The  first  process,  sale,  is  much  more  difficult ; 
an  object,  even  of  great  value,  cannot  at  all  times  be  readily 
exchanged  for  money.  Hence  the  possessor  of  money  occu- 
pies a  more  favorable  position  than  the  possessor  of  any  other 
commodity ;  *in  order  to  satisfy  his  wants  he  has  but  one 
operation  to  perform,  and  this  operation  is  an  easy  one.  The 
possessor  of  any  other  kind  of  goods  must  accomplish  two 
operations,  one  of  which  is  comparatively  difficult.  It  has 
been  well  said  that  a  particular  commodity  corresponds  only  to 
a  special  and  determinate  want,  while  money  corresponds  to  an 
indeterminate  and  universal  want.  The  owner  of  a  very  useful 
commodity  may  not  know  what  to  do  with  it.  The  possessor 
of  money,  on  the  other  hand,  is  never  thus  embarrassed ;  he  is 
always  able  to  find  some  one  to  accept  it,  and  if  by  chance  he 
is  at  a  loss  how  to  make  use  of  it  at  once,  he  still  has  the  sim- 
ple expedient  of  keeping  it  for  a  more  favorable  opportunity. 
With  other  commodities  this  expedient  is  not  always  possible.1 

1  Money,  besides  being  the  only  direct  instrument  of  purchase,  possesses 
another  very  important  quality  :  it  is  the  common  means  of  paying  debts.  No 


222  PRINCIPLES   OF   POLITICAL  ECONOMY 

But  if,  instead  of  considering  the  position  of  an  individual, 
we  regard  the  whole  mass  of  individuals  constituting  society, 
the  point  of  view  changes,  and  the  economist's  thesis  (that 
the  amount  of  money  in  a  country  is  a  matter  of  indifference) 
is  more  correct.  Little  do  I  care  for  a  tenfold  increase  in 
the  amount  of  money  in  my  possession,  if  the  same  increase 
takes  place  for  all  the  other  members  of  society.  For  in  such 
an  event  I  should  be  no  richer  than  before ;  since  wealth  is 
purely  relative  I  should  not  be  able  to  obtain  a  larger  amount 
of  goods.  The  sum-total  of  wealth  out  of  which  our  claims 
or  "  orders  "  are  paid  would  be  no  greater  than  before,  and 
each  "  order,"  i.e.  each  piece  of  money,  would  entitle  me  to  a 
share  only  one-tenth  as  large.  •  In  other  words,  the  purchas- 
ing power  of  each  coin  would  be  one-tenth  as  great ;  or,  all 
prices  having  been  multiplied  by  ten,  my  position  would  not 
be  changed. 

Yet,  in  their  relations  with  each  other,  particular  countries 
as  well  as  particular  individuals  gain  by  being  well  provided 
with  money.  If  the  amount  of  money  in  this  country  should 
be  multiplied  by  ten,  there  would  be  no  change  in  the  wealth 
of  Americans  as  compared  with  each  other,  the  increase  being 
equivalent  for  all ;  but  the  country  as  a  whole  would  be  more 
favorably  situated  as  regards  trade  with  foreign  countries. 
The  economists  who,  in  their  zealousness  to  overthrow  the 
mercantile  system,  have  denied  this,  are  mistaken.  It  is  of 
course  true  that  an  abundance  of  money  in  this  country 
would  cause  its  value  to  fall  here,  but  it  would  still  retain, 
at  least  for  a  while,  its  former  purchasing  power  in  foreign 

other  wealth  enjoys  this  singular  power,  for  law  as  well  as  custom  regards 
money  as  the  only  means  of  payment.  Under  the  prevailing  industrial  sys- 
tem, everybody  is  a  debtor  for  a  more  or  less  considerable  sum.  Now  the 
possession  of  goods  worth  more  than  the  sum-total  of  a  man's  debts  may  be 
useless,  if  at  the  required  time  he  is  unable  to  meet  his  outstanding  obliga- 
tions by  means  of  that  particular  form  of  wealth  called  hard  cash.  It  some- 
times happens  that  men  "  fail,"  despite  the  fact  that  when  all  reckonings  are 
made  their  assets  are  found  to  exceed  their  liabilities.  Is  it  surprising,  then, 
that  so  much  importance  is  attached  to  a  commodity  on  the  possession  of 
which  our  credit  and  our  commercial  honor  may  at  any  moment  depend  ? 


THE   VALUE    OF   MONEY  223 

markets ;  and  we  might   thus   use    our  increased  supply  of 
money  to  purchase  goods  abroad. 

The  economist's  thesis  that  the  quantity  of  money  is  a 
matter  of  indifference  is  not  perfectly  true  until  we  extend 
our  purview  so  as  to  embrace  not  only  many  individuals  and 
many  nations,  but  all  mankind.  We  may  then  assert  with 
perfect  truth  that  the  discovery  of  gold  mines  a  hundred 
times  richer  than  those  now  known  would  not  benefit  man 
at  all.  Nay,  such  a  discovery  would  rather  be  a  disadvan- 
tage ;  for  as  gold  would  then  be  worth  no  more  than  copper, 
we  should  be  compelled  to  load  our  pockets  with  as  cumber- 
some a  kind  of  money  as  Lycurgus  sought  to  force  upon  the 
Lacedaemonians.1 

III.  Disturbances  caused  by  Fluctuations  in  the  Value  of  Money 

Price,  as  we  have  seen,  is  only  one  of  the  many  possible 
ways  of  expressing  exchange  value.  Although  we  often 
employ  one  of  these  terms  for  the  other,  it  is  inadvisable  to 
confound  them.  To  believe,  for  example,  that  when  the 
price  of  a  commodity  is  the  same  in  two  places,  its  value  is 
necessarily  the  same,  or,  inversely,  to  believe  that  when  the 
price  of  a  thing  has  varied,  its  value  must  also  have  varied 
to  the  same  extent,  may  be  a  gross  error. 

If  the  value  of  gold  and  silver  is  different  to-day  from  what 
it  was  yesterday,  it  is  evident  that  the  value  of  any  other 
object,  measured  in  gold  and  silver,  must  also  have  changed ; 
that  is  to  say,  its  price  has  varied  to  a  degree  inversely  pro- 
portionate to  the  change  that  has  taken  place  in  the  value  of 
the  precious  metals.  Suppose  that  the  length  of  a  yard-stick 
is  reduced  by  one-tenth.  Henceforth,  all  objects  measured 
with  it  appear  to  be  longer ;  yet  in  reality  they  are  no  longer 
than  before,  because  the  apparent  change  is  only  an  illusion 
produced  by  a  contraction  of  the  unit  of  measurement.  Simi- 

1  Adam  Smith  declared  that  "  the  most  abundant  mines  of  precious  metals 
would  add  nothing  to  the  wealth  of  the  world,  as  a  product  whose  value  is 
based  on  its  scarcity  is  necessarily  depreciated  when  it  abounds." 


224  PKINCIPLES    OF   POLITICAL   ECONOMY 

larly,  if  gold  and  silver  lose  one-tenth  of  their  value  (because, 
let  us  say,  of  their  abundance),  it  is  evident  that  the  price  of 
all  objects,  i.e.  their  value  expressed  in  money,  must  have 
increased. 

We  may  therefore  formulate  the  following  law:  Every 
fluctuation  in  the  value  of  money  causes  a  proportionate  in- 
verse fluctuation  in  prices.1 

As  the  quantity  of  gold  and  silver  is  the  principal  factor 
affecting  the  value  of  money,  we  may  add  this  second 
formula,  which  is,  however,  open  to  more  exceptions  than 
the  first :  Every  fluctuation  in  the  quantity  of  money  causes 
a  proportionate  change  in  prices.  If,  for  example,  the  quan- 
tity of  money  in  a  country  should  be  doubled,  we  may  be 
sure  that,  all  other  things  being  equal,  prices  will  rise  con- 
siderably ;  it  would  be  unsafe,  however,  to  maintain  that  they 
would  be  precisely  doubled.2 

It  is  consequently  very  difficult  to  tell  whether  or  not  the 
value  of  commodities  has  really  changed,  for  the  only  meas- 
ure we  have  is  itself  subject  to  variations.  So  it  may  hap- 
pen that  an  increase  in  wages,  for  instance,  is  due  not  to  a 
real  rise  in  the  value  of  labor,  but  to  a  fall  in  the  value  of 
money,  in  which  the  wage  of  labor  is  paid.  Several  devices 

1  Is  the  inverse  statement  true  ?    Can  we  say  that  every  fluctuation  in  prices 
means  an  inverse  fluctuation  in  the  value  of  money  ?    Yes,  if  the  change  of 
prices  is  absolutely  general.    No,  if  the  change  is  not  general ;  for  in  this 
case  a  change  in  the  prices  of  particular  objects  must  be  due  to  circumstances 
concerning  these  objects  themselves. 

2  This  second  formula,  called  the  quantity  theory  of  money,  has  lately 
been  adversely  criticised  and  even  expressly  denied  ;  but,  we  believe,  without 
reason.    We  must,  of  course,  be  careful  to  add  the  condition,  "all  other 
things  being  equal,"  thus  indicating  that  quantity  is  not  the  only  factor  that 
influences  the  value  of  money.     The  development  of  exchange,  the  growth  of 
population,  the  substitution  of  instruments  of  credit  for  metallic  money,  and, 
above  all,  the  increased  or  decreased  rapidity  of  circulation  (which  is  equiva- 
lent in  its  effects  to  an  increase  or  decrease  in  quantity),  constitute  just  so 
many  causes  which  may  affect  the  utility  of  money  and  thus  alter  its  value, 
independently  of  any  change  in  the  quantity  thereof. 

Horace  White's  "Money  and  Banking  "  (first  ed.)  contains  an  interesting 
chapter  on  the  quantity  theory  of  money. 


THE   VALUE   OF   MONEY  225 

have  been  suggested  for  detecting  and  correcting  these 
apparent  variations  in  value  which  are  due  to  variations  in 
the  standard.  The  most  customary  method,  however,  is  that 
known  as  the  system  of  "  index  numbers." 

Suppose  that  a  list  were  prepared  of  all  commodities 
without  exception,  indicating  the  prices  of  all  these  commodi- 
ties at  a  given  time.  Now  suppose  that  after  ten  years  or  a 
hundred  years  we  should  prepare  a  new  list  of  these  com- 
modities and  their  current  prices ;  and,  after  comparing  the 
new  list  with  the  old,  suppose  we  should  find  that  all  prices 
without  exception  had  increased  50  per  cent.  We  should 
then  declare  that  the  value  of  money  had  really  fallen  33 
per  cent.  Since,  under  these  conditions,  an  object  which 
formerly  had  cost  two  dollars  now  costs  three,  we  may  say 
that  three  dollars  now  have  the  same  value  as  that  previously 
possessed  by  two,  and  that  money  has  lost  one-third  of  its 
value. 

This  conclusion  is  justified  by  the  fact  that  a  general  and 
uniform  rise  in  prices  can  have  but  one  of  two  explanations. 
Either  we  must  admit  that  things  are  what  they  seem  to  be, 
and  that  all  commodities  really  have  undergone  a  general 
and  parallel  rise  in  prices;  or,  we  must  acknowledge  that 
the  value  of  one  commodity  —  money  —  has  fallen,  no  altera- 
tion having  taken  place  in  the  value  of  other  commodities. 
Now  which  of  these  two  explanations  is  preferable  ?  Com- 
mon sense  permits  of  no  hesitation.  The  second  explana- 
tion is  simple  and  comprehensible,  whereas  the  first  is  highly 
improbable  because  of  the  extraordinary  combination  of  cir- 
cumstances which  it  necessarily  presupposes.  Is  it  reason- 
able to  imagine  the  existence  of  some  influence  which  can 
simultaneously  cause  a  uniform  change  in  the  value  of 
objects  which  are  entirely  dissimilar  as  regards  their  utility, 
their  quantity,  and  the  method  of  their  production  ?  What 
conceivable  cause  could,  simultaneously  and  t  to  a  similar 
extent,  raise  the  price  of  silk  and  of  coal,  of  wheat  and  of 
diamonds,  of  lace  arid  of  wine,  of  land  and  of  manual  labor, 


226  PRINCIPLES   OF   POLITICAL   ECONOMY 

and  of  all  other  things  that  have  little  to  do  with  each  other 
or  that  are  in  fact  entirely  independent  ?  To  adopt  such 
an  explanation  as  this  would  be  just  as  unreasonable  as 
to  maintain  that  the  Ptolemaic  system  explains  planetary 
motion  better  than  the  Copernican  theory.  For  planetary 
motion  also  may  be  explained  in  two  different  ways :  either 
by  the  assumption  that  the  whole  universe  turns  about 
our  own  earth  from  the  east  to  the  west,  or  simply  that 
our  own  earth  revolves  in  the  opposite  direction.  Even  if 
there  were  no  direct  proof  of  the  latter  explanation,  it  would 
not  be  reasonable  to  hesitate  for  a  moment  in  the  choice  of 
one  of  these  solutions.  Is  it  natural  to  suppose  that  planets 
so  different  in  their  nature  and  so  far  apart  as  the  sun,  the 
moon,  and  the  stars,  move  around  this  small  earth  of  ours  in 
such  a  way  as  to  keep  their  respective  places  and  distances 
from  each  other,  like  soldiers  on  parade?  The  very  same 
kind  of  logic  is  involved  in  the  supposition  that  all  prices 
can  rise  simultaneously  and  uniformly.  Such  an  occurrence 
may  be  reasonably  explained  only  as  a  kind  of  optical  illu- 
sion, an  apparent  change  caused  by  a  real  but  opposite  change 
in  the  value  of  money. 

It  must  be  admitted,  however,  that  an  absolutely  general 
and  uniform  rise  in  prices  never  takes  place.  As  the  value 
of  each  object  is  to  some  degree  independent  of  that  of  other 
objects  and  consequently  has  its  own  causes  of  variation, 
what  we  really  do  observe  in  the  economic  world  is  that  the 
prices  of  different  commodities  vary  in  different  degrees. 
Some  prices  rise,  others  remain  stationary,  and  still  others 
fall.  Yet  if,  during  any  period,  skilful  calculations  should 
show  that  there  had  been  an  average  rise  of  say  10  per  cent, 
this  phenomenon,  for  the  reasons  given  above,  could  be  ex- 
plained only  by  an  equal  and  inverse  change  (i.e.  a  fall)  in 
the  value  of  money.  Economists  have  recently  attempted  a 
calculation  of  this  nature  by  preparing  lists  of  "  index  num- 
bers." These  lists  include  the  principal  commodities,  and 
the  price  at  a  given  epoch  is  taken  as  the  starting-point.  A 


THE   VALUE   OF   MONEY  227 

list  is  prepared  for  each  of  the  years  under  study,  and  a  com- 
parison of  totals  indicates  whether  or  not  prices  as  a  whole 
have  increased  or  diminished.  To  simplify  the  use  of  these 
calculations,  it  is  customary  to  express  the  total  for  the  year 
which  serves  as  the  basis  of  comparison  as  100 ;  the  totals  for 
the  other  years  are  then  expressed  upon  this  basis  of  calcu- 
lation. The  result  of  this  simplification  is  a  table  like  the 
following :  — 

1860  ....  100 

1870  ....  144 

1880  ....  105 

1890  ....  94 

1900  ....  93 

Such  tables  as  these,  invented  by  an  Englishman  named 
Newrnarch,  do  not  always  give  conclusive  results.  It  is, 
however,  conceivable  that  we  may  thus  ascertain,  by  means 
of  the  fluctuations  in  prices,  the  variations  in  the  value 
of  money.  It  would  even  be  possible  to  publish,  at  regular 
intervals,  tables  of  these  fluctuations  which  would  serve  as 
an  official  guide  for  the  correction  of  the  errors  resulting 
from  the  use  of  gold  and  silver  as  measures  of  value.  Thus 
a  debtor  who  in  1860  had  borrowed  $100  might  be  released 
from  his  debt  upon  paying  $93  in  1900,  —  the  amount  due 
being  determined  by  the  rise  or  fall  in  the  value  of  money.1 

1  Tables  analogous  to  those  referred  to  were  proposed  as  early  as  1822  by 
Lowe  and  in  1833  by  Scrope. 

The  Austrian  economist  Menger  has  proposed  a  bolder  solution  than  that 
mentioned  above,  viz.  the  creation  of  a  money  whose  value  would  be  invari- 
able and  consequently  beyond  the  influence  of  the  general  law  of  values. 
He  believes  that  we  could  accomplish  this  by  issuing  money  in  quantities 
so  adjusted  as  to  neutralize  the  causes  of  fluctuations  as  soon  as  they  should 
arise. 

We  regard  this  scheme  as  theoretically  reasonable,  on  the  condition  that 
the  money  be  issued  in  the  form  of  international  paper  money  ;  metallic 
money,  the  raw  material  of  which  is  produced  by  nature,  could  hardly  be 
issued  in  quantities  strictly  determined  in  advance.  (Refer  to  the  section  on 
Paper  Money.) 


228  PRINCIPLES   OF   POLITICAL   ECONOMY 


IV.  Whether  Metallic  Money  will  continue  to  decline  in 

Value 

The  depreciation  of  metallic  money  during  the  past  thou- 
sand years  is  a  fact  proved  by  all  sources  of  historical  in- 
formation that  touch  upon  this  point.  This  depreciation 
has  been  enormous.1  At  the  time  of  Charlemagne  the  value 
of  silver  was  approximately  nine  times  as  great  as  it  is  to- 
day. Shortly  before  the  discovery  of  America  it  was  still  six 
times  as  great.  At  the  time  of  the  French  Revolution  it  was 
more  than  twice  what  it  is  to-day.  The  prediction  that  its 
value  will  continue  to  decline  indefinitely  seems,  therefore,  to 
be  perfectly  legitimate.  Human  industry,  moreover,  is  every 
day  becoming  more  ingenious  in  discovering  the  places  in 
which  nature  has  stored  away  her  treasures,  and  also  more 
expert  in  exploiting  these  stores  economically.  Neither 
silver  nor  gold  is  as  rare  as  it  is  supposed  to  be.  There  is 
gold  and  silver  everywhere,  —  in  infinitesimal  quantities,  to 
be  sure,  but  the  rapid  progress  of  metallurgy  is  continually 
lowering  the  point  below  which  it  does  not  pay  to  extract 
the  metal  from  the  ore.  It  is  therefore  probable  that  the 
precious  metals,  becoming  more  and  more  abundant,  will 
continue  to  fall  in  value. 

It  may,  of  course,  be  maintained  that  the  demand  for  these 
metals  will  be  increased  by  the  growth  of  population  and  the 
development  of  exchange,  and  that  this  increased  demand 

1  The  decline  has  not  been  steady,  but  intermittent ;  at  times  the  value  of 
money  has  risen.  According  to  d'Avenel's  "  Histoire  des  Prix,"  the  historical 
curve  of  values  is  as  follows  :  — 

850  9 

1375 3 

1500 6 

1600 2£ 

1750 3 

1890 1 

The  most  striking  fact  brought  out  by  these  figures  is  the  great  fall  in  the 
value  of  money  during  the  sixteenth  century,  due  to  the  discovery  of  America. 


DEPRECIATION   OF   MONEY  229 

will  counterbalance  the  effects  of  an  increased  supply.  But 
we  must  remember  that  this  factor  is  in  turn  more  than 
counterbalanced  by  the  improvement  and  extension  of  the 
credit  system  and  modern  means  of  transportation  and  inter- 
course. In  the  great  modern  financial  centres  we  have  suc- 
ceeded in  almost  entirely  suppressing  the  use  of  metallic 
money,  and  are  now  carrying  on  a  vast  amount  of  business 
by  means  of  credit  devices  and  clearing-houses,  practically 
without  the  intervention  of  money. 

Is  this  increase  in  the  quantity  of  money,  and  the  subse- 
quent depreciation  of  its  value,  a  cause  for  regret  or  rejoic- 
ing ?  Is  it  a  matter  of  any  importance  ?  It  may  be  claimed 
that  an  abundance  of  money  makes  nobody  richer  in  reality, 
and  that  it  is  likely  to  make  money  constantly  grow  heavier 
in  proportion  to  its  value, — as  though  gold  had  been  changed 
into  lead.  But  even  this  difficulty  may  be  obviated  by  the 
use  of  paper  money  and  checks.  Again,  supposing  that  the 
so-called  precious  metals  should  become  common  metals,  is 
it  not  likely  that  other  rarer  metals  would  be  found  to  take 
their  place  ? l 

Yet  this  is  not  a  matter  of  indifference.  In  reality,  the 
continued  depreciation  of  the  monetary  standard  is  a  phe- 
nomenon of  great  social  importance,  the  effects  of  which 
must  be  regarded,  after  careful  consideration,  as  beneficent. 
First  of  all,  the  depreciation  of  money  results  ordinarily,  as 
we  have  seen,  in  a  rise  of  prices.  Now,  a  rise  of  prices  is  a 
stimulus  to  production  ;  it  sustains  the  spirit  of  enterprise  ; 
it  is  favorable  to  an  increase  in  wages ;  it  acts  like  a  tonic, 
and  may  be  regarded  as  a  symptom  of  economic  vigor.2 

1  Spectrum  analysis  reveals  the  existence  of  new  metals  much  more  pre- 
cious than  gold.     We  are  familiar  with  metals  that  cannot  yet  be  employed 
to  any  extent^  but  which  we  shall  doubtless  soon  learn  to  utilize  by  means  of 
electric  furnaces.    Lithium   and   zirconium,   for   instance,   cost  $7500  per 
pound,  and  vanadium  $11,800. 

2  A  curious  proof  of  this  may  be  found  in  new  countries,  like  those  of 
South  America,  where  the  inconsiderate,  increase  of  the  amount  of  paper 
money  caused  an  enormous  rise  of  prices.    Producers  and  business  men 


230  PRINCIPLES    OF    POLITICAL   ECONOMY 

The  depreciation  of  money,  moreover,  is  favorable  to  the 
debtor  classes,  inasmuch  as  they  can  pay  their  debts  by  giv- 
ing a  value  less  than  that  which  they  received  ;  for  then  it 
means  —  to  repeat  a  familiar  expression  used  in  referring 
to  the  discovery  of  mines  in  America  —  an  easy  way  to  pay 
old  debts.  It  operates  in  just  the  same  way  as  a  fall  in  the 
rate  of  interest,  or,  better  yet,  like  an  unavoidable  deprecia- 
tion of  capital.  Now,  it  is  very  desirable  that  the  old  debts 
shall  be  wiped  out,  and  not  be  permitted  to  weigh  upon 
the  descendants  of  the  borrowers.1  This  is  particularly  de- 
sirable for  governments,  which  are  the  greatest  debtors  and 
the  only  really  perpetual  ones. 

rejoice  at  this  rise,  and  in  general  are  very  hostile  to  the  financial  measures 
that  would  remedy  it,  as,  for  example,  the  withdrawal  of  paper  money. 
Their  opposition  is  of  course  ill-founded,  but  their  attitude  is  none  the  less 
characteristic. 

1  Mr.  Herckenrath,  in  the  Dutch  translation  of  this  book,  criticises  the 
doctrine  sustained  in  this  section.  He  does  not  regard  the  depreciation  of 
precious  metals  as  always  desirable.  Von  Ihering  also,  in  his  "  Kampf  urns 
Recht,"  declared  that  "to  sympathize  with  the  debtor  is  the  clearest  sign  of 
the  weakness  of  an  epoch."  We  acknowledge,  later  on,  in  the  section  on  the 
"History  of  Loans  at  Interest,"  that  nowadays  the  lender  may  indeed  be 
entitled  to  quite  as  much  sympathy  as  the  borrower,  especially  when  the 
lender  is  a  small  investor  and  the  borrower  is  a  large  corporation.  Never- 
theless, the  growing  power  of  money  seems  to  us  always  to  constitute  a  seri- 
ous social  danger,  and  the  depreciation  of  the  metals  appears  to  be  a  fortunate 
corrective  of  this  tendency. 

[Professor  Gide  is  fond  of  the  idea  that  a  perpetual  depreciation  of  money 
is  a  perpetual  stimulus  to  trade.  It  should  be  observed,  however,  that  the 
creditor  who  knows  that  he  is  going  to  be  exploited  will  recoup  himself  in  the 
interest  rates.  If  this  is  not  the  case,  high  prices  will  enable  debtors  to  pay 
their  debts  with  less  wealth  than  they  borrowed,  and  thus  permit  the  paftial  re- 
pudiation of  these  debts.  The  most  elementary  commercial  honesty  requires 
that  the  debtor  shall  pay  back  (aside  from  interest)  just  what  he  received,  — 
no  more  and  no  less.  But  if,  for  example,  I  have  borrowed  a  thousand  dollars, 
and  prices  subsequently  rise  to  such  an  extent  that  a  thousand  dollars  will 
purchase  only  as  much  as  could  previously  be  bought  for  nine  hundred  dol- 
lars, it  is  evident  that  in  repaying  a  thousand  dollars  I  am  returning  less  value 
than  I  received  ;  in  other  words,  I  have  been  enabled  to  repudiate  one  tenth 
of  my  debt.  A  large  amount  of  capital  loaned  in  this  country  consists  of 
the  savings  of  people  with  small  incomes,  and  repudiation  would  bear  heavily 
upon  them.  —  C.  W.  A.  V.] 


DEPRECIATION   OF   MONEY  231 

It  is  true  that  to  the  very  degree  that  the  depreciation  of 
money  is  favorable  to  the  producer  and  to  the  debtor,  it  is 
prejudicial  to  the  consumer  and  to  the  creditor.  But  even 
this  effect  we  regard  as  desirable.  For  if  the  consumer 
is  also  a  producer,  his  increased  expenditure  is  easily  coun- 
terbalanced by  the  increased  value  of  his  products  or  by 
higher  wages.1  If  he  is  simply  a  consumer,  and  not  a  pro- 
ducer, so  much  the  worse  for  him  ;  the  rise  of  prices  will 
only  put  a  heavier,  perfectly  legitimate  burden  upon  him. 
Again,  if  the  creditor  has  given  credit  for  short  periods,  such 
as  are  customary  in  commerce,  the  depreciation  in  money 
will  scarcely  affect  him.  But  if  his  credit  is  for  a  long  period 
or  for  perpetuity,  i.e.  if  it  constitutes  the  basis  of  a  permanent, 
independent  income  (such  as  that  provided  by  government 
bonds,  land  rent,  long-term  railroad  bonds,  or  municipal 
loans),  it  is  no  more  than  right  that  the  gradual  reduction 
of  his  income  should  warn  him  that  he  is  playing  the  part  of 
a  parasite,  and  that  if  he  wants  to  retain  his  social  position 
or  transmit  it  unimpaired  to  his  descendants,  he  would  do 
well  to  play  a  more  active  part  or  teach  his  children  to  do  so. 
Some  time  ago  a  great  financier  of  the  French  Restoration, 
Laffitte,  who  was  by  no  means  a  socialist,  speaking  of  the 
man  who  lives  on  a  fixed  and  independent  income,  said  : 
"He  must  either  work  or  reduce  his  wants.  The  capitalist 
plays  the  part  of  the  idler ;  his  task  is  to  economize,  and  it 
is  not  a  severe  one."  2 

To  prove  the  validity  of  what  we  have  said,  let  us  suppose 
that  our  prediction  regarding  the  fall  in  the  value  of  precious 

1  Unfortunately,  the  change  of  wages  due  to  a  rise  in  the  price  of  com- 
modities does  not  follow  very  rapidly  upon  this  change  of  conditions  ;  it  is 
likely  to  take  place  some  time  later,  pede  claudo,  wherever  laborers  are  not 
organized.     But  where  the  workers  are  organized  into  trades  unions,  they 
generally  demand,  and  frequently  obtain,  a  speedy  readjustment  of  wages. 

2  The  intelligent  members  of  the  "retired"  capitalist  class  have  several 
means  of  escaping  the  effects  of  a  fall  in  the  value  of  money  ;  they  can,  for 
example,  invest  their  funds  in  productive  enterprises,  or  purchase  credit 
instruments  below  par. 


232  PRINCIPLES    OF    POLITICAL   ECONOMY 

metals  will  not  be  fulfilled,  —  and  we  must  admit  that  our 
predictions  are  by  no  means  infallible.  What  would  be  the 
result?  We  should  then  observe  effects  opposite  to  those 
that  we  have  indicated :  a  constant  fall  in  prices  would 
burden  industry  and  discourage  the  spirit  of  enterprise; 
governments  would  be  oppressed  by  the  weight  of  a  rapidly 
increasing  debt  and  destined  to  become  bankrupt ;  the  idle 
classes  of  money-owners  would  grow  rich  by  their  idleness 
more  surely  and  quickly  than  the  other  classes  could  by  their 
thrift.  Such  a  state  of  affairs  as  this  would  be  most  liable 
to  provoke  a  social  revolution.  Let  us  therefore  rejoice  in 
the  depreciation  of  the  precious  metals,  so  long  as  it  lasts  ; 
it  serves  at  least  as  a  lubricant  for  the  wheels  of  the  eco- 
nomic mechanism. 

V.  The  Conditions  which  should  be  fulfilled  by  all  Good 

Money 

All  legal  money  should  have  a  metallic  value  strictly  equal 
to  its  nominal  value.  This  is  the  most  important  principle 
regarding  money. 

We  know  (page  221)  that  money  has  a  twofold  function: 
it  is  the  sole  instrument  of  purchase,  and  the  only  instrument 
for  the  payment  of  debts.  Both  of  these  functions  are  the 
result  of  custom,  but  both  require  the  sanction  of  law.  In. 
fact,  only  the  law  can  oblige  a  creditor  or  seller  to  receive  a 
certain  kind  of  money  in  payment  of  debts  or  for  goods. 
This  legally  privileged  position  of  money  makes  it  what  is 
called  legal  tender.  But  the  legal  tender  quality  is  based 
on  the  condition  above  indicated.  Here,  let  us  say,  is  a  ten- 
dollar  gold  piece.  By  stamping  on  this  coin  the  designation 
"  ten  dollars,"  as  well  as  the  seal  of  the  United  States,  the 
government  intends  to  certify  that  this  coin  is  really  worth  ten 
dollars,  and  that  everybody  shall  accept  it  for  that  amount 
without  fear  of  misrepresentation.  Should  the  coin  not  con- 
tain this  value,  the  government  commits  a  forgery.  During 
many  centuries,  unfortunately,  many  governments  and  rulers 


THE   QUALITIES   OF   GOOD   MONEY  233 

have  shown  but  little  scrupulousness  in  this  respect ;  but  at 
the  present  time  it  is  a  matter  of  national  dignity  and  good 
faith  in  which  no  government  would  dare  be  found  at  fault. 
Every  piece  of  money  must  therefore  be  regarded  from 
two  points  of  view.  As  a  coin,  it  possesses  a  fixed  value, 
marked  upon  its  surface.  As  an  ingot,  it  has  a  value  equivalent 
to  the  market  price  of  the  metal  it  contains.  (There  is  of 
course  a  market  price  for  gold  and  silver,  as  well  as  for 
wheat  and  cotton.)  Whenever  these  two  values  coincide, — 
whenever,  for  instance,  the  metallic  disk  weighing  258  grains 
and  containing  232.20  grains  of  pure  gold  (i.e.  whose  fine- 
ness is  nine-tenths)  has  an  actual  commercial  value  of  ten 
dollars,  —  we  may  say  that  this  money  is  good  money  or 
sound  money.1  It  remains  to  ascertain  how  this  perfect  coin- 

1  It  would  appear,  however,  that  coined  gold  should  be  worth  a  little  more 
than  bullion,  for  the  reason  that  all  objects  are  worth  more  when  manufac- 
tured than  when  in  the  raw  state,  and  that  the  difference  should  be  equal 
to  the  cost  of  coming.  This  is  in  fact  the  case  ;  but  the  cost  of  coining  is  so 
small  that  it  makes  practically  no  difference.  It  amounts  to  one-fifth  of  one 
per  cent  of  the  value  of  the  coin.  In  France,  for  example,  the  twenty-franc 
gold  piece  is  made  of  gold  worth  19.96  francs.  Some  governments  transform 
metals  gratuitously  into  money ;  or,  in  other  words,  the  government  bears 
the  actual  cost  of  coinage,  which  is  sometimes  called  brassage.  England  is 
an  example  of  this.  Whenever  a  government  charges  more  than  the  actual 
cost  of  coinage,  and  regards  its  Mint  as  a  source  of  revenue,  the  term  seignior- 
age is  used  to  designate  this  additional  charge.  The  name  is  derived  from 
the  fact  that  rights  of  coinage  in  the  middle  ages  were  often  made  a  most 
valuable  prerogative  of  the  "  seignior,"  or  feudal  lord.  Where  the  govern- 
ment pays  the  brassage  we  sometimes  also  speak  of  gratuitous  coinage,  which 
must  be  sharply  distinguished  from/ree  coinage.  The  latter  term  does  not 
mean  that  coining  is  done  for  nothing,  but  that  any  private  person  has  a  right 
to  bring  bullion  to  the  Mint  in  any  quantities  and  have  it  coined  (whether  he 
is  charged  seigniorage  or  not).  It  should  also  be  noted  that  sometimes  the 
term  seigniorage  is  used  to  include  brassage. 

Gold  bullion  is  converted  into  coin  at  the  United  States  mints  free  of 
charge  except  for  the  alloy  contained  therein.  Formerly  the  seigniorage  on 
silver  subsidiary  coins  was  5  to  7  per  cent.  Since  the  great  decline  in  the 
price  of  silver  took  place,  it  has  become  more  than  100  per  cent.  At  one 
time  the  government  could  buy  only  16  pounds  of  silver  bullion  with  one 
pound  of  gold,  but  now  it  can  buy  more  than  35  pounds  for  the  same 
amount. 


234  PRINCIPLES    OF    POLITICAL    ECONOMY 

cidence  can  be  established  and  maintained.  Two  possible 
conditions  of  the  monetary  system  should  be  examined  in 
this  connection :  — 

I.  If  the  value  of  the  ingot  is  higher  than  that  of  the  coin  ; 
if,  for  instance,  the  gold  is  legally  worth  only  ten  dollars,  and 
the  weight  of  metal  contained  in  it  is  worth  eleven  or  twelve 
dollars,  the  money  is  said  to  be  heavy.     This  is  an  excellent 
defect;  but  it  is  nevertheless  a  defect,  and,  as  we  shall  see, 
it  may  have  rather  serious  consequences.     But  we  need  not 
greatly  fear  such  a  state  of  affairs  as  this,  for  the  following 
reasons :   (a)  Governments  seldom  coin  too  heavy  money ; 
should  this  occur,  it  can  only  be  due  to  inadvertence,  inas- 
much as  it  involves  a  loss.     To  coin  ten-dollar  gold  pieces 
with  metal  that  is  worth  eleven  dollars  would  be  as  ruinous 
as  for  a  manufacturer  to  make  rails  for  twenty  dollars  a  ton 
with  steel  that  is  worth  twenty-two.      (5)  But  even  if  this 
condition  existed,  as  the  result  of  circumstances  to  be  ex- 
plained later  (for  example,  a  sudden  rise  in  the  price  of  the 
metal),  it  cannot  last  very  long;  for  as  soon  as  the  public 
discovers  that  ten-dollar  gold  pieces  are  worth  eleven  dollars 
as  bullion,  everybody  will  regard  them  as  bullion,  i.e.  as 
merchandise,  and  will  sell  them  by  weight  so  as  to  reap  the 
profit   thus   obtainable.     This   process   will   continue   until 
the  gold  coins  have  completely  disappeared.     As  we  shall 
point  out  later,  this   state  of  affairs  occurs  frequently  in 
countries  having  a  bimetallic  system.1 

II.  If  the  value  of  the  ingot  is  less  than  that  of  the  coin  ; 
if,  for  example,  the  coin  is  legally  worth  ten  dollars  and  the 
gold  it  contains  is  worth  only  nine,  money  is  said  to  be  light. 
This  eventuality  is  much  more  to  be  dreaded  than  the  pre- 

1  The  commercial  ratio  of  gold  and  silver  at  the  time  the  United  States  Mint 
was  founded  in  1793  was  the  same  as  the  mint  ratio,  — 15  to  1.  But  in  1795 
the  commercial  ratio  of  the  two  metals  rose  to  15.37  to  1,  and  continued  to 
advance  until  it  reached  16.25  to  1  in  1813.  The  result  was  that  gold  coins 
had  a  greater  bullion  value  than  their  coinage  value  and  were  exported.  In 
1850,  on  the  other  hand,  the  silver  dollar  was  worth  $1.02  in  gold  and  had 
entirely  disappeared  from  use.  (See  the  section  on  Gresham's  Law.) 


THE   QUALITIES    OF    GOOD   MONEY  235 

ceding  one,  for  two  reasons  :  (a)  Because,  unlike  the  opposite 
condition  of  affafrs,  it  is  liable  to  lead  a  government  into 
temptation.  To  make  ten-dollar  pieces  out  of  ingots  that 
are  worth  only  nine  dollars  is  an  alluring  proposition  for  an 
impecunious  and  not  too  scrupulous  government ;  and  numer- 
ous governments  have,  as  a  matter  of  fact,  succumbed  to  the 
temptation.  In  France,  Italy,  and  in  most  of  the  countries 
of  continental  Europe,  before  the  great  development  of 
modern  commerce,  the  debasement  of  money  was  a  favorite 
device  of  weak  or  profligate  monarchs.1  (6)  Because,  once 
such  light  money  has  entered  into  circulation,  it  is  not  forced 
out  of  circulation  by  the  pressure  of  economic  forces  (as  in 
the  case  of  heavy  money),  but  it  remains  most  persistently ; 
and,  as  we  shall  see  when  we  take  up  G-resham's  law,  it  is 
one  of  the  most  difficult  things  in  the  world  to  drive  light 
money  out  of  circulation. 

To  maintain  the  identity  of  metallic  value  and  legal  value, 
it  is  customary  under  every  good  monetary  system  —  and 
this  is  a  principle  of  capital  importance  —  to  give  anybody 
the  right  to  have  metal  coined  into  money  by  th.e  Mint,  if  he 

1  "  Both  in  quantity  and  quality,  in  weight  and  in  fineness,  the  circulating 
money  was  pinched  and  robbed,  until  the  actual  amount  of  pure  metal  bore 
sometimes  a  ludicrously  small  ratio  to  the  original  fine  contents  of  the  coin. 
The  English  *  pound '  was  once  a  pound-weight  of  silver.  The  pound  of  standard 
silver  is  now  coined  into  66  instead  of  20  shillings.  The  '  pound  scots '  of 
which  we  read  had  but  one  thirty-sixth  of  its  original  weight.  The  florin  and 
the  Spanish  maravedi  were  once  pieces  of  gold.  The  former  is  now  a  piece  of 
silver ;  the  latter  apiece  of  copper."— FRANCIS  WALKER,  "  Political  Economy." 

It  is  well  known  that  the  monetary  unit  under  the  old  regime  in  France  was 
called  the  livre  (pound)  ;  but  it  is  not  so  generally  known  that  it  derived  its 
name  originally  from  the  fact  that  in  the  days  of  Charlemagne  it  actually  repre- 
sented the  weight  of  a  Carolingian  pound  of  silver  (weighing  408  grammes)  ; 
i.e.  it  represented  a  weight  equal  to  that  of  82  present-day  francs.  How  did 
it  fall  little  by  little  to  five  grammes,  which  was  the  weight  of  the  livre  at  the 
end  of  the  old  regime,  and  which  is  now  the  weight  of  the  franc  ?  Solely  by 
a  continual  series  of  emissions  of  lighter  and  lighter  money.  Each  monarch 
"  clipped"  a  little  off  the  weight  of  the  old  livre,  while  endeavoring  to  main- 
tain its  former  legal  value. 

McMaster,  in  his  "History  of  the  People  of  the  United  States"  (Vol.  I, 
pp.  190  et  seq.),  gives  an  interesting  account  of  the  American  monetary 


236  PRINCIPLES   OF   POLITICAL   ECONOMY 

so  desires.  This  is  called  free  coinage.  As  long  as  it  exists, 
the  identity  of  values  is  guaranteed ;  for  if  the  value  of  the 
gold  piece  ever  rises  above  that  of  the  metal  in  it,  everybody 
will  hasten  to  avail  himself  of  the  profit  to  be  made  by 
having  metal  coined  into  money.  Everybody  will  buy  gold 
and  take  it  to  the  Mint  to  be  converted  into  coin,  until 
the  scarcity  of  gold  and  the  increase  in  the  number  of  gold 
coins  has  reestablished  the  identity  of  the  two  values.  It 
should  be  possible  to  smelt  good  money  without  any  loss  of 
value.  Good  money  can  stand  the  "fire  test."  Here  we 
may  apply  the  economic  axiom  that  whenever  two  objects 
can  be  transformed  into  each  other  at  will,  they  must  neces- 
sarily have  an  equal  value. 

There  are,  however,  in  all  countries  certain  kinds  of  coins 
which  do  not  fulfil  the  preceding  requirement;  i.e.  their 
intrinsic  value  is  inferior  to  their  legal  value.  These  coins 
are  called  subsidiary  or  token  money.  They  are  usually  coins 
of  small  value,  generally  made  of  copper,  but  sometimes  of 
silver;  they  are  not  customarily  used  for  large  payments, 
but  only  for  fractional  amounts.  The  legislator,  therefore, 

system  at  the  close  of  the  Revolutionary  War,  —  its  chaotic  state,  and  the 
practices  of  counterfeiting  and  clipping.  "  The  clipping  was  worse  than 
the  counterfeiting,  for  scarce  a  coin  could  be  found  .  .  .  which  had  not  at 
some  time  been  subjected  to  the  shears.  For  much  of  the  clipping  and 
paring  the  people  were  to  be  held  responsible  ;  but  the  government  itself  had, 
in  an  hour  of  dire  extremity,  resorted  to  the  same  practice  as  a  desperate 
means  of  increasing  its  funds.  When  some  coins  were  sent  to  Timothy 
Pickering  to  be  used  in  payment  of  the  debts  of  the  quartermaster's  depart- 
ment, there  came  with  them  orders  that  he  himself  should  clip  them,  as  the 
government  was  too  poor  to  bear  the  charge  of  the  goldsmiths.  .  .  .  The 
clipping  done  by  the  government  differed  from  the  clipping  done  by  the 
rogues  in  that  it  stopped  when  the  last  grain  the  law  would  allow  had  been 
taken.  At  this  point  sharpers  and  counterfeiters  began  their  work,  and 
went  so  far  that  it  was  no  longer  safe  to  take  any  sum  of  money  in  discharge 
of  a  debt  till  every  coin  in  the  batch  had  been  duly  weighed  in  the  balance. 
The  day,  indeed,  seemed  near  at  hand  when,  as  Washington  said,  every  man 
would  be  constrained  to  travel  with  a  pair  of  balances  in  his  pocket,  or  run 
the  risk  of  receiving  gold  and  silver  at  one-fourth  less  by  weight  than  by 
count,  and  when,  as  Teague  complained,  there  would  be  five  quarters  to 
every  dollar." 


GRESHAM'S  LAW  237 

does  not  feel  bound  under  these  conditions  to  insist  on  the 
observance  of  the  above  monetary  principle.  But  in  tem- 
porarily abandoning  the  principle  of  the  equality  of  values, 
he  at  the  same  time  withholds  the  qualities  of  good  money. 
He  refuses  to  confer  upon  token  money  the  quality  of  legal 
tender;  no  one  is  compelled  to  take  it  in  payment,  save  in 
limited  quantities.1  In  addition  to  this,  he  suspends  free 
coinage  for  token  money ;  otherwise  everybody  would  have 
metal  coined  into  subsidiary  coins,  or  token  money,  in  order 
to  gain  the  difference  between  the  metallic  value  and  the 
legal  value.  The  government  reserves  to  itself  the  right  to 
issue  such  amounts  of  token  money  as  in  its  judgment  are 
required  by  the  needs  of  the  community  ;  and  it  should 
never  issue  an  excessive  quantity  of  this  money. 

VI.   Gresham's  Law 

In  every  country  where  two  kinds  of  legal  money  are  in 
circulation,  the  bad  money  always  drives  out  the  good. 

This  is  one  of  the  most  curious  laws  of  political  economy, 
named  after  the  commercial  adviser  of  Queen  Elizabeth,  who 
is  credited  with  having  discovered  it  three  centuries  ago. 
Long  before  Gresham,  however,  Aristophanes  had  pointed 
out  and  analyzed  the  strange  fact  that  men  seem  to  prefer 
bad  money  to  good  money.2  What  makes  this  fact,  and  the 
law  which  formulates  it,  still  more  remarkable  is  that  it 
would  be  totally  incomprehensible  in  the  case  of  any  other 
article  than  money.  It  is  indeed  difficult  to  understand  why 
men  should  prefer  bad  to  good  merchandise.  The  economic 

1  Silver  coins  smaller  than  one  dollar  are  legal  tender  to  the  amount  of  ten 
dollars  in  one  payment.    Coins  of  nickel  and  copper  are  legal  tender  to  the 
amount  of  25  cents  in  one  payment. 

2  "The  public  has  often  seemed  to  us  to  treat  the  wisest  and  the  best  of  our 
citizens  just  as  it  does  old  and  new  coins.     For  we  do  not  use  the  latter  at 
all,  except  in  our  own  houses  or  abroad,  though  they  are  of  purer  metal,  finer 
to  look  at,  the  only  ones  that  are  well  coined  and  round ;  on  the  contrary, 
we  prefer  to  use  vile  copper  pieces,  struck  and  stamped  in  the  most  infamous 
fashion."  —  ARISTOPHANES,  "Frogs,"  vv.  718-726  (Brunck's  ed.). 


238  PRINCIPLES   OF  POLITICAL   ECONOMY 

organization  of  modern  society,  marked  by  liberty  of  labor 
and  by  free  competition,  is  based  entirely  on  the  postulate 
that  men  will  under  all  circumstances  prefer  the  articles  that 
are  of  the  best  quality  and  that  best  satisfy  their  wants. 
Why,  then,  should  men  act  differently  when  money  is  the 
article  in  question  ? 

Our  astonishment  ceases  when  we  reflect  that  money  is 
not  destined,  like  other  wealth,  either  for  our  consumption 
or  for  production,  but  solely  for  exchange.  Of  two  fruits, 
we  prefer  the  more  luscious ;  of  two  watches,  the  one  that 
keeps  the  better  time.  But  of  two  pieces  of  money,  unequal 
in  quality,  it  matters  little  to  us  whether  we  use  the  one  or  the 
other ;  they  are  not  for  our  personal  use,  but  only  employed 
to  pay  our  creditors  and  our  tradesmen.  Hence  it  would  be 
foolish  to  use  the  better  money  for  this  purpose  ;  on  the  con- 
trary, it  is  to  our  interest  to  choose  the  worse,  and  this  is 
precisely  what  we  do.  Our  choice  is  of  course  conditioned 
upon  the  assumption  that  the  creditor  or  tradesman  shall  not 
have  the  right  to  refuse  the  inferior  money ;  in  other  words, 
the  bad  money  must  have  paying  power  as  well  as  the  good. 
When  this  is  the  case,  i.e.  whenever  both  kinds  of  money 
are  legal  tender,  Gresham's  law  is  applicable. 

This  explains  why  bad  money  continues  in  circulation, 
but  not  why  good  money  disappears.  Where  does  the  good 
money  go  ?  It  disappears  in  three  different  ways  :  by  hoard- 
ing, payments  abroad,  and  sale  by  weight. 

(1)  Hoarding.  When  people  want  to  put  money  aside  for 
possible  emergencies,  i.e.  when  they  wish  to  keep  it  for  them- 
selves, they  do  not  pick  out  the  bad  pieces  to  save.  On  the 
contrary,  they  choose  the  best,  because  these  offer  the  most 
security.  The  panic-stricken  people  who  wished  to  hoard 
money  during  the  French  Revolution  did  not  waste  their 
time  by  saving  depreciated  paper  money,  —  the  so-called  as- 
signats,  —  but  laid  aside  good  gold  coins.  The  contempo- 
raries of  our  own  Revolutionary  War  did  not  save  the  next 
to  worthless  "'continental "  paper  money,  but  whatever 


GRESHAM'S  LAW  239 

metallic  money  they  could  get  hold  of.  Banks  do  the  same 
thing,  preferring  to  increase  their  supply  of  good  rather  than 
that  of  poor  money.  In  this  manner  a  considerable  amount 
of  the  good  money  may  disappear  from  circulation.  This 
first  cause  of  the  disappearance  of  good  money,  however,  is 
only  temporary. 

(2)  Payments  abroad.     These  are  more  important  in  their 
effect  than  the  preceding  cause  of  the  disappearance  of  good 
money.     Although  a  country  never  pays  in  coin  for  more 
than  a  small  part  of  its  imports,  yet  it  is  always  necessary  to 
send  a  certain  amount  of  specie  abroad.     Now,  although  we 
may  legally  pay  our  debts  to  our  compatriots  with  bad  money 
as  well  as  with  good,  so  long  as  both  are  legal  tender,  we 
do  not  have  this  alternative  in  paying  for  purchases  made 
abroad.     As  the  foreign  creditor  is  by  no  means  compelled 
to  accept  our  national  money,  he  takes  it  only  for  the  weight 
of  fine  metal  it  contains,  i.e.  for  its  commercial  value.     There- 
fore we  cannot  send  him  light  money.     We  keep  the  light 
money  for  use  at  home,  where  it  is  as  serviceable  as  good 
money,  and  we  reserve  the  good  money  for  foreign  commerce.1 

(3)  But  good  money  disappears  most  rapidly  from  circula- 
tion because  of  its  sale  by  weight.     Selling  money  by  weight 
appears  to  be  a  peculiar  occupation  in  which  to  engage,  and 
its  usefulness  does  not  seem  easily  demonstrable.      Never- 
theless, it  is  very  simple.     As  soon  as  a  rise  in  the  value  of 
gold  gives  gold  coin  an  intrinsic  value  higher  than  its  legal 
value,  —  as  soon  as  gold  money  is  worth  more  as  metal  than 
as  coin,  —  it  is  clearly  profitable  to  stop  using  it  as  money, 
and  to  regard  it  as  bullion.     It  is,  therefore,  withdrawn  from 
circulation,  and  finds  its  way  to  the  market  for  precious 
metals.     Should  the  value  of  bronze,  for  example,  rise  con- 

1  Professor  Leroy-Beaulieu  has  very  well  summarized  this  whole  matter  in 
the  formula  :  local  money  drives  out  universal  money. 

It  is  noteworthy  that  Aristophanes  observed  the  two  facts  that  the  public, 
which  prefers  to  use  bad  money  in  exchange,  nevertheless  employs  good 
money  "  in  its  own  houses  "  and  "  abroad,"  i.e.  for  hoarding  and  for  foreign 
trade. 


240  PRINCIPLES   OF   POLITICAL  ECONOMY 

siderably,  is  it  not  almost  certain  that  numerous  bronze 
articles,  such  as  bells,  cannons,  and  statuettes,  would  be 
melted  for  the  value  of  the  metal  they  contain  ?  Or  again, 
if  the  value  of  paper  increased  very  greatly,  would  not  many 
books  be  taken  down  from  our  library  shelves  and  sold  by 
weight  as  so  much  paper  ?  It  is  just  the  same  with  money. 
When  a  precious  metal  rises  in  value,  the  pieces  of  money 
coined  from  that  metal  lose  their  character  of  money  and  be- 
come simple  commodities  that  men  can  sell  at  a  profit. 

Gresham's  law  is  applicable  in  the  following  cases  :  — 

(J.)  Whenever  worn  money  is  in  circulation  together  with 
newly  coined  money.  It  was  in  this  case  that  the  law  was 
first  discovered  by  Sir  Thomas  Gresham.  New  coins  had 
been  struck  to  take  the  place  of  those  in  circulation,  which 
were  greatly  depreciated  (far  more  by  clipping  than  by 
wear) ;  and  it  was  noted  with  dismay  that  the  new  coins 
speedily  disappeared,  while  the  old  ones  seemed  to  be  more 
abundant  than  ever.  Unless  a  government  resorts  to  fre- 
quent recoinages,  it  will  encounter  great  difficulties  in 
replacing  old  and  worn-out  coins  by  new  ones. 

(i?)  Whenever  depreciated  paper  money  is  in  circulation 
together  with  metallic  money.  Under  these  conditions,  if 
the  depreciation  of  the  paper  is  at  all  considerable,  coin  is 
driven  out  of  circulation  on  a  very  large  scale.  During  the 
whole  period  of  the  depreciation  of  United  States  notes 
(1862—1879),  we  were  exporting  gold  in  large  quantities. 
This  left  at  home  only  paper  money,  because  our  paper  money 
would  not  circulate  beyond  the  borders  of  the  nation.1 

(  (7)  Whenever  light  money  is  in  circulation  together  with 
good  money,  or  even  when  good  money  is  in  circulation  to- 

1  Similarly,  of  late  years,  nearly  all  good  Italian  money  was  driven  into 
France.  Vainly  did  the  Italian  government  adopt  various  measures  to  cause 
its  return,  and  to  obtain  from  the  French  government  a  prohibition  of  its 
circulation  in  France,  where  it  is  accepted  equally  with  French  gold  and 
silver  money.  But  Italy  succeeded  only  by  attacking  the  evil  at  its  founda- 
tion—  by  withdrawing  her  paper  money,  or  at  least  by  depriving  it  of  the 
quality  of  legal  tender. 


GOLD,   SILVER,   AND   COPPER  241 

gether  with  heavy  money.     In  this  case  the  lighter  money 
drives  out  the  other. 

Of  the  three  cases  here  enumerated,  the  last  is  by  far  the 
most  important ;  it  occurs  in  almost  all  countries  which 
have  adopted  both  a  gold  and  a  silver  coinage.  This  case 
will  be  investigated  in  the  discussion  of  monometallism  and 
bimetallism,  which  we  purpose  to  study  in  the  following 
sections. 


VII.    The  Necessity  of  employing  Several  Metals,  and  the  Dif- 
ficulties which  result  therefrom 

The  discussion  which  has  long  been  waged  on  this  cele- 
brated subject  does  not  turn,  as  might  be  supposed,  on  the 
question  whether  a  country  should  employ  several  metals  or 
only  one  metal  in  its  monetary  system.  That  question  does 
not  even  arise.  For  it  is  evident  that  every  civilized  country 
is  obliged  to  employ,  simultaneously,  coins  of  gold,  of  silver, 
and  of  copper  or  some  similar  metal.  We  could  scarcely 
think  of  using  gold  alone.  The  one-dollar  gold  pieces  author- 
ized to  be  coined  in  1849  are  now  no  longer  issued  because 
they  are  too  small  to  be  used  conveniently.  And  if  these 
pieces,  weighing  only  25.8  grains,  are  too  small,  a  gold  cent 
would  be  a  mere  impalpable  atom  !  Nor  can  we  employ 
copper  exclusively,  unless  we  are  willing  to  revert  to  the 
days  of  early  Rome;  for  a  piece  of  copper  worth  five  dollars 
weighs  about  thirty-five  pounds.  Silver,  though  less  incon- 
venient because  its  value  is  considerably  higher  than  that  of 
copper,  would  not  suffice  by  itself.  Our  silver  dollars  are 
almost  too  large  and  cumbersome,  and  our  silver  three-cent 
pieces,  not  coined  since  1873,  are  too  small  for  ordinary 
use.  We  are  therefore  compelled  to  use  all  three  metals 
simultaneously.  But  there  is  no  need  to  use  all  three  as 
legal  tender.  In  fact,  one  of  them  —  copper  —  never  pos- 
sesses that  quality  ;  it  is  always  simply  token  money  or  small 
change.  Only  the  other  two,  therefore,  are  of  interest  in 


242  PEINCIPLES   OF   POLITICAL  ECONOMY 

this  connection.  Should  both  precious  metals  receive  the 
character  and  attributes  of  legal  tender,  or  should  only  one 
be  thus  employed  ?  This  question,  formerly  called  that  of 
the  single  or  double  standard,  is  now  more  correctly  termed 
the  problem  of  monometallism  or  bimetallism. 

If  we  confer  the  rank  of  legal  tender  on  only  one  of  the 
two  —  say  gold  —  there  is  no  difficulty.  In  this  event  silver 
coinage,  with  copper  coinage,  is  relegated  to  the  rank  of 
token  or  subsidiary  money  ;  a  purely  conventional  value  is 
given  it,  but  no  one  is  obliged  to  take  it  in  payment.  When 
gold  coinage  is  the  only  legal  money,  it  alone  needs  have 
perfectly  equal  legal  and  intrinsic  values. 

If  we  allow  both  silver  and  gold  coins  to  assume  the  char- 
acter of  legal  tender,  the  situation  becomes  far  more  compli- 
cated. For  a  better  understanding  of  the  difficulties  which 
may  arise  in  the  actual  employment  of  both  metals  simultane- 
ously as  legal  money,  let  us  briefly  review  the  monetary  his- 
tory of  the  United  States. 

In  1792  our  statesmen,  following  the  example  of  the  coun- 
tries of  Europe,  adopted  the  double  standard  of  gold  and  silver. 
At  Hamilton's  instance  the  legal  ratio  was  fifteen  grains  of 
silver  for  one  grain  of  gold.  Soon  afterward,  silver  cheapened 
so  that  15.61  grains  were  required  in  the  bullion  market  to 
purchase  one  grain  of  gold.  As  a  result,  gold  went  out  of 
circulation,  and  the  country  was  thrown  practically  upon  a 
silver  basis.  Gold,  which  had  begun  to  grow  scarce  in  1810, 
entirely  disappeared  in  1817.  In  1822  Mr.  Raguet,  an  econo- 
mist of  the  period,  wrote  to  the  National  G-azette  that  "although 
the  coinage  of  gold  continues  to  be  large  ($1,319,030  in  1820), 
not  a  gold  coin  is  anywhere  to  be  seen  in  circulation."  The 
facilities  of  the  Mint  were  simply  used-by  merchants  to  certify 
the  weight  and  fineness  of  gold  for  exportation. 

In  view  of  these  facts,  various  projects  for  a  change  were 
brought  forward  in  Congress,  and  in  1834  the  so-called  Gold 
Bill  provided  for  a  ratio  of  1  to  15.60  ;  but  when  it  came  up 
for  discussion  an  amendment  was  moved  making  the  ratio 


AMERICAN   METALLIC   MONEY  243 

1  to  16,  and  this  amendment  was  adopted  without  a  division. 
Then  another  amendment  was  offered  making  the  ratio  1  to 
15.625,  and  was  supported  on  the  ground  that  it  was  the  true 
market  ratio,  and  that  it  would  keep  gold  and  silver  in  con- 
current circulation.  The  adoption  of  the  ratio  1  to  16,  it 
was  contended,  would  drive  silver  out  of  circulation.  Yet 
this  ratio  was  finally  adopted,  making  the  United  States  a 
gold-standard  nation  in  practice,  although  the  double  stand- 
ard was  retained  in  theory.  Since  1837,  when  other  changes 
were  made,  the  weights  of  the  coins  and  their  legal  ratio 
have  remained  unchanged.  The  silver  dollar  was  given 
371.25  grains  of  pure  metal,  and  the  gold  eagle  232.2 
grains;  this  is  a  legal  ratio  of  15.988  to  1.  This  ratio  of 
practically  16  to  1  —  almost  as  celebrated  a  formula  in  eco- 
nomics as  the  formula  for  TT'  in  geometry  — -then  overvalued 
gold  so  decidedly  that  silver  coins  began  to  disappear  from 
circulation.  In  1850  the  silver  dollar  was  worth  $1.02  in 
gold  and  had  entirely  disappeared  from  use.  In  the  early  fif- 
ties the  discovery  of  gold  in  California  and  in  Australia  caused 
the  annual  output  of  gold  to  increase  fourfold.1  Silver,  on 
the  other  hand,  became  still  more  scarce  in  consequence 
of  the  development  of  trade  in  India,  which  absorbed  vast 
quantities  of  this  metal.  The  result  was  that  gold  continued 
to  cheapen  so  that  Congress  in  1853  had  to  debase  the  frac- 
tional silver  coins  in  order  to  prevent  them  from  being  melted 
and  sold  for  bullion.  The  legislation  of  1834  and  1837  had 
thrown  the  United  States  upon  a  gold  basis,  for  while  the 
legal  ratio  was  16  to  1,  the  commercial  ratio  until  1873  was 
about  15^  to  1. 

In  1870  Congress  again  began  to  consider  the  question  of 
revising  the  coinage  laws.  The  silver  dollar  had  then  been 
out  of  circulation  for  more  than  a  generation,  and  was  worth 
11.027  in  gold.  By  the  act  of  1873  the  silver  dollar  was 

1  The  average  annual  world's  production  of  gold  from  1841  to  1850  was 
valued  at  about  -$37,000,000  ;  from  1851  to  1860  the  annual  output  averaged 
nearly  $140,000,000. 


244  PRINCIPLES   OF   POLITICAL   ECONOMY 

dropped  from  the  list  of  authorized  coins,  and  the  gold  dollar 
was  definitely  named  as  the  unit  of  value. 

At  about  the  same  time,  however,  another  great  change 
took  place  in  the  production  of  precious  metals.  The  output 
of  gold  decreased  with  the  gradual  exhaustion  of  the  gold 
mines  of  Australia  and  California.  The  discovery  of  the 
"bonanza"  silver  mines  in  the  West  greatly  increased  the 
production  of  silver ;  the  world's  annual  output  of  this  metal 
was  increased  by  about  half.  Then  Germany  adopted  the 
gold  standard,  demonetized  her  silver  money,  and  cast  upon 
the  market  the  silver  thalers  which  she  no  longer  wanted. 
Once  again  the  relative  value  of  the  two  metals  was  changed, 
but  this  time  in  the  opposite  direction.  In  the  market  for 
precious  metals  one  could  purchase,  for  a  pound  of  gold,  not 
merely  15  or  16  pounds  of  silver,  but  17,  then  18,  then  19,  and 
in  1876  nearly  21  pounds  of  silver.  In  other  words,  silver  had 
lost  a  fourth  of  its  value  compared  with  gold.  It  was  hence- 
forth evident  that  every  ingot  of  silver  which  constituted  a 
silver  coin  underwent  a  proportionate  depreciation.  In  1876 
the  gold  value  of  371.25  grains  of  fine  silver  (the  amount 
contained  in  a  silver  dollar)  was  only  89  cents. 

Now  people  saw  that  if  the  coinage  of  the  silver  dollar  had 
not  been  stopped  by  the  law  of  1873,  the  cheapened  dollar 
might  have  come  back  into  circulation  and  driven  out  gold. 
There  arose  a  demand  for  the  free  and  unlimited  coinage  of 
the  silver  dollar,  and,  yielding  to  the  subsequent  agitation, 
Congress  in  1878  passed  the  "  Bland- Allison  Act."  This  act 
provided  that  the  United  States  should  purchase  monthly 
not  more  than  $4,000,000  and  not  less  than  12,000,000  worth 
of  silver  bullion,  to  be  coined  into  silver  dollars  of  the  pre- 
viously customary  weight.  These  silver  dollars  were  made 
full  legal  tender.  Under  this  act  the  Treasury  always  pur- 
chased the  minimum  amount,  and  placed  $378,166,793  in 
circulation  between  1878  and  1890.  Yet  this  law  failed  to 
raise  the  value  of  silver,  for  in  1889  the  silver  dollar  was 
worth  only  72  cents. 


AMERICAN   METALLIC    MONEY  245 

In  1890  the  Bland-Allison  Act  was  repealed  and  the 
"  Sherman  Act "  passed.  The  new  law  required  the  Secre- 
tary of  the  Treasury  to  purchase  monthly  4,500,000  ounces 
of  fine  silver  bullion  at  the  market  price,  which  was  not  to 
exceed  $1  for  371.25  grains.  Treasury  notes  were  issued 
in  payments  for  this  metal ;  they  were  to  be  redeemable  on 
demand  in  coin,  and  to  be  a  legal  tender  in  payment  of  all 
debts,  except  where  otherwise  expressly  stipulated  in  the 
contract.  But  even  these  increased  purchases  of  silver 
failed  to  sustain  its  price,  which,  after  a  brief  rise,  fell  to 
60  cents  in  1893.  Between  1890  and  1893  the  net  exports 
of  gold  exceeded  $150,000,000,  in  spite  of  the  fact  that 
our  exports  of  merchandise  greatly  exceeded  imports.  The 
banks  began  to  hoard  gold  and  to  pay  their  obligations 
in  paper  or  in  silver.  The  government  was  compelled  to 
pay  out  large  quantities  of  gold,  while  its  revenues  were 
composed  chiefly  of  paper  and  silver.  In  1893  the  Sherman 
Act  was  repealed.  At  the  present  time  the  currency  of  the 
United  States  is  the  most  heterogeneous  to  be  found  in  any 
civilized  country,  although  the  act  of  March  14,  1900,  was  in- 
tended to  somewhat  systematize  our  monetary  conditions,  to 
make  the  gold  dollar  the  standard  unit  of  value,  and  to  main- 
tain all  other  forms  of  money  issued  or  coined  by  the  United 
States  at  a  parity  with  this  standard.1 

The  most  striking  lesson  to  be  drawn  from  our  monetary 
history  —  and  the  same  is  true  of  the  monetary  history  of 
France,  England,  and  Germany  —  is  the  constant  change  in 
the  market  value  of  the  metals  and  the  frequent  recoinages  and 
changes  of  system  to  which  it  has  given  rise.  The  concurrent 
circulation  of  the  two  metals  can  continue  only  so  long  as  the 
market  ratio  coincides  with  the  legal  ratio.  We  are  thus  led 
to  inquire :  Must  we  be  incessantly  recoining  first  one  metal 
and  then  the  other,  in  order  to  fit  their  weights  to  varia- 
tions in  the  value,  and  thus  preserve  the  necessary  requisite  of 
good  money,  namely,  strict  equivalence  of  intrinsic  and  legal 

1  Consult  Horace  White's  "  Money  and  Banking,"  2d  ed.,  Boston,  1902. 


246  PRINCIPLES    OF   POLITICAL   ECONOMY 

value  ?     This  seems  to  be  the  inevitable  conclusion.     But  to 
attempt  this  would  be  manifestly  impracticable  and  absurd.1 

VIII.   Why  Bimetallist  Countries  really  have  but  One  Money 

As  we  have  just  seen  in  the  account  given  of  our  own 
monetary  history  as  a  nation,  every  bimetallist  system  pre- 
sents the  serious  disadvantage  of  not  being  able  to  maintain, 
for  both  metals,  that  identity  of  intrinsic  and  legal  value 
which  should  be  the  characteristic  of  all  good  money.  Ac- 
cording to  the  variations  in  the  value  of  the  two  metals,  one 
or  the  other  of  them  is  incessantly  becoming  too  heavy  or 
too  light. 

It  may  be  thought,  perhaps,  that  this  disadvantage  is 
theoretical  rather  than  practical.  "What  does  it  matter," 
it  may  be  asked,  "  if  our  gold  or  our  silver  coins  have  a  legal 
value  a  little  above  or  a  little  below  their  real  value?  No 
one  notices  it,  and,  in  any  case,  no  one  suffers  from  it." 

This  is  a  mistake.  There  is  in  such  a  condition  of  affairs 
a  practical  disadvantage,  and,  more  than  that,  a  real  peril. 
The  lighter  money  will  gradually  drive  the  heavier  out  of 
circulation,  so  that  every  country  which  is  nominally  under 

1  A  little  reflection  will  show  that  it  would  be  sufficient  to  alter  the  weight 
of  only  one  of  the  two  moneys,  and  regard  the  other  as  the  basis  or  unit. 
For  instance :  we  might  take  the  silver  dollar  as  the  unit  and  alter  the 
weights  of  gold  coins  according  to  the  variations  in  its  value.  But  in  spite 
of  the  simplification,  this  system  would  be  almost  as  impracticable  as  the 
other. 

There  is  also  the  possibility  of  keeping  a  fixed  weight  for  gold  coins, 
without  indicating  their  value,  and  hence  permitting  their  value  to  oscillate 
freely  according  to  the  laws  of  demand  and  supply ;  in  some  countries  this 
plan  is  adopted,  e.g.  in  Cochin  China  for  the  piaster.  During  the  revolu- 
tionary period  this  system  was  proposed  in  France,  and  to-day  some  econo- 
mists regard  it  as  the  sole  possible  solution  of  the  monetary  problem.  But 
then  gold  pieces  would  no  longer  be  real  money ;  they  would  be  nothing 
more  than  ingots  which  circulate  like  any  other  commodity.  There  would  be 
a  current  price  for  gold  coins  just  as  for  cotton  and  wheat,  and  it  would 
be  subject  to  the  same  variations.  What  complications  such  a  system  would 
introduce  into  business  matters,  facilitating  all  sorts  of  snares  and  tricks  in 
dealing  with  the  unsophisticated  ! 


DIFFICULTIES   OF   BIMETALLISM  247 

the  double-standard  system  falls,  as  a  matter  of  fact,  into  the 
singular  position  of  never  being  able  to  keep  in  circulation  more 
than  one  kind  of  money,  and  this  one  always  the  worse.  A 
regular  movement  of  flux  and  reflux  carries  away  the  metal 
that  is  high  in  value,  and  brings  into  the  country  that  which 
is  low.  This  is  indeed  nothing  more  than  the  application  of 
Gresham's  law,  of  which  our  own  monetary  history  is  a  con- 
clusive demonstration.  In  1837,  when  gold  fell  in  value,  and 
in  1850,  when  it  fell  still  lower  because  of  circumstances 
mentioned  in  the  preceding  section,  silver  money  continued 
to  disappear  and  to  be  replaced  by  gold  coins.  The  same 
thing  took  place  in  France  under  the  second  empire,  when 
the  so-called  napoleons  were  widely  circulated.  People  in 
France  were  not  much  accustomed  to  this  money  at  that 
time ;  it  was  greatly  admired,  and  the  courtiers  of  the  period 
praised  the  wealth  and  glory  of  the  new  reign.  In  reality 
gold  money  was  so  abundant  only  because  it  was  made  of 
depreciated  metal. 

The  manner  in  which  gold  at  that  time  became  so  abundant 
is  explained  very  easily ;  the  following  example  should  make 
the  process  comprehensible.  The  London  banker  who  wanted 
to  obtain  silver  to  send  to  India  naturally  tried  to  get  it  where 
he  could  buy  it  cheapest.  In  London,  for  a  kilogramme  of 
gold  he  could  purchase  only  15  kilogrammes  of  silver.  But 
by  sending  his  kilogramme  of  gold  to  the  Paris  Mint  he 
could  receive  3100  francs  in  gold,  and  then  exchange  these 
3100  gold  francs  for  3100  silver  francs,  which  weigh  exactly 
15 1  kilogrammes.  Thus  for  his  kilogramme  of  gold  he  would 
obtain  15J  kilogrammes  of  silver.1 

1  The  inverse  operation  was  performed  just  as  easily.  A  Paris  banker  could 
collect  3000  silver  francs,  weighing  exactly  15  kilogrammes,  and  send  them 
to  London  in  exchange  for  one  kilogramme  of  gold,  —  1  to  15  being 
the  ratio  of  market  values.  Then  he  would  have  his  kilogramme  of  gold 
sent  from  London  and  coined  at  the  Paris  Mint  into  3100  francs  of  gold. 
Thus  the  gross  gain  on  the  transaction  was  100  francs,  or  more  than  3  per 
cent.  Even  when  the  cost  of  coinage  (seigniorage)  and  transportation  was 
deducted,  the  transaction  was  still  very  profitable. 


248  PRINCIPLES   OF   POLITICAL   ECONOMY 

It  is  easy  to  understand  that  this  business  led  to  the 
exportation  of  silver  from  France,  and  the  importation  of 
an  equal  quantity  of  gold  money.  This  is  precisely  the  way 
Gresham's  law  operates :  heavy  money  is  replaced  by  light 
money.  Whole  shiploads  of  silver  coins  were  exported  from 
France  to  India.  They  were  bought  for  their  weight  in 
silver,  to  be  sold  to  the  Bombay  and  Madras  Mints,  and  there 
converted  into  rupees.  During  this  period  these  Indian 
Mints  turned  into  rupees  more  than  2,000,000,000  francs  of 
French  money. 

It  was  not  long  before  there  was  a  veritable  dearth  of  sil- 
ver money  in  France.  In  the  old  days,  prohibitive  measures 
would  have  been  resorted  to,  and  perhaps  penalties  would  have 
been  inflicted  on  those  who  exported  silver  money.  But 
economic  science,  by  pointing  out  the  cause  of  the  trouble, 
made  it  possible  to  suggest  a  more  efficacious  remedy.  Sil- 
ver money  was  disappearing  because  it  was  too  heavy ;  it  was 
therefore  necessary  to  diminish  its  weight  or  reduce  its  fine- 
ness, and  thus,  so  to  speak,  clip  its  wings  and  make  its  flight 
abroad  impossible.  This  step  was  taken,  by  common  agree- 
ment on  the  part  of  France,  Italy,  Belgium,  and  Switzerland, 
on  December  23,  1865.  The  standard  of  fineness  for  all  sil- 
ver coins,  except  five-franc  pieces,  was  lowered  from  nine- 
tenths  to  835  thousandths,  —  a  diminution  in  their  value  of 
more  than  7  per  cent.  All  these  coins  then  became,  and  have 
since  remained,  token  money ;  according  to  the  invariable 
principles  which  prevail  in  this  matter,  they  have  since  that 
date  lost  their  character  of  legal  money.  Why  was  an  excep- 
tion made  in  favor  of  the  five-franc  piece  ?  There  was  no 
sound  reason  for  this,  but  France  insisted  on  the  concession. 
To  turn  all  silver  coins  into  token  money  would  have  been 
entirely  to  abandon  silver  money  as  legal  tender ;  it  would 
have  been  an  out-and-out  acceptance  of  the  gold  monometal- 
list  system,  as  in  England,  and  such  a  revolution  in  the 
monetary  system  terrified  the  French  government.  The 
five-franc  piece  therefore  was  kept,  with  its  former  weight 


BIMETALLISM    IN    FRANCE  249 

and  fineness  and  character  of  legal  money.  Naturally  it  con- 
tinued to  leave  the  country,  but  it  could  be  dispensed  with 
more  easily  than  the  smaller  change  ;  if  necessary,  it  could 
be  replaced  by  the  gold  five-franc  piece. 

From  1871  on,  as  we  have  seen,  a  reversal  was  effected  in 
the  respective  values  of  the  two  metals,  and  the  French  mon- 
etary system  was  once  more  thrown  out  of  order,  this  time  in 
the  opposite  direction.  Gold  money  became  too  heavy  and 
consequently  began  to  emigrate ;  the  silver  became  too  light 
and  began  to  increase  in  circulation.  The  operations  ex- 
plained above  were  renewed,  but  in  an  exactly  opposite 
manner  and  with  opposite  effects.  In  order  that  there  shall 
be  no  obscurity  upon  this  essential  point,  we  shall  repeat  the 
explanation  by  describing  this  inverse  operation. 

A  Paris  banker  procured  3100  francs  in  gold,  either  in 
twenty-franc  or  ten-franc  pieces.  This  sum  made  exactly  a 
kilogramme  of  gold.  He  sent  the  money  off  to  London,  where 
one  kilogramme  of  gold,  in  the  market  for  precious  metals,  was 
worth  20  kilogrammes  of  silver.  Our  banker,  therefore, 
bought  20  kilogrammes  of  silver,  had  them  sent  to  Paris  and 
turned  into  coin  at  the  Mint.  As  the  Mint  coined  one  kilo- 
gramme of  silver  into  40  five-franc  pieces,  our  banker  received 
4000  francs  in  five-franc  pieces ;  his  gross  profit  was  900 
francs.  Deduct  the  cost  of  transportation,  seigniorage,  and 
the  premium  necessary  for  obtaining  gold  pieces  if  they  have 
become  scarce,  and  the  transaction  was  nevertheless  a  profit- 
able one.  Now  it  is  evident  that  for  France  this  business 
resulted  in  a  decrease  of  gold  money  and  an  increase  of  sil- 
ver money.  If  continued  long  enough,  the  final  result  would 
have  been  the  entire  substitution  of  silver  money  for  gold 
money  in  circulation. 

The  nations  belonging  to  the  Latin  Union  (which  Greece 
had  joined  in  the  meantime)  in  1878  sought  to  avert  this  new 
danger.  Just  as  in  1865  they  had  stopped  the  flight  of  sil- 
ver money  by  lowering  its  fineness,  they  could  now  have  pre- 
vented the  departure  of  gold  money  by  lowering  its  fineness 


250  PRINCIPLES   OP   POLITICAL   ECONOMY 

or  diminishing  its  weight.  But  the  frequent  recoinage,  first 
of  one  money,  then  of  another,  would  have  ended  in  the  dis- 
organization of  the  whole  monetary  system.  So  it  was  thought 
advisable  to  resort  to  a  simpler  plan.  The  convention  of 
November  5,  1878,  completely  suspended  the  coinage  of  five- 
franc  silver  pieces.  Henceforward  the  transaction  described 
above  became  impossible ;  there  was  no  longer  any  profit  in 
buying  silver  abroad,  for  it  could  no  longer  be  coined  into 
money  in  France.  This  measure,  too,  fully  succeeded  in  pre- 
serving for  France  her  fine  supply  of  metallic  gold,  which  had 
not  yet  been  perceptibly  drawn  upon.  But,  obviously,  this 
convention,  which  closed  to  silver  a  market  of  nearly  80,000,000 
persons  and  thus  reduced  its  sale,  hastened  the  depreciation  of 
the  metal  ;  in  other  words,  it  aggravated  the  evil.1  Silver, 
which  until  then  had  lost  but  10  or  12  per  cent  of  its  value, 
continued  to  fall  until,  in  1901,  it  possessed  less  than  half  its 
original  value. 

Under  these  conditions,  the  free  coinage  of  silver  money 
has  not  been  resumed  by  the  Latin  Union,  and  no  one  can 
tell  whether  it  will  ever  be  taken  up  again.  We  may  there- 
fore say  that  although  the  nations  of  the  Latin  Union  are  still 
legally  under  a  system  of  bimetallism,  they  have  in  reality 
adopted  gold  monometallism.  Of  all  their  silver  coins,  only 
one  is  legal  tender,  and  this  is  the  one  that  is  no  longer  coined!* 

IX.    Whether  it  is  Advisable  to  adopt  the  Monometallic 

System 

After  the  foregoing  explanation,  there  seems  to  be  no  room 
for  hesitation.  The  monometallic  system  is  infinitely  more 

1  Since  then,  many  nations  have  abandoned  the  silver  standard  for  the 
gold.     (See  the  following  section.)      Even  India  in  1893  gave  up  the  coinage 
of  silver.    All  these  circumstances  have  accelerated  the  fall  in  the  value  of 
silver,  which  in  1901  was,  compared  with  gold,  as  1  to  34.6B. 

2  This  somewhat  lengthy  account  of  the  Latin  monetary  system  has  been 
reproduced  here  from  the  original  French  edition,  because  it  is  not  only  an 
excellent  illustration  of  the  principles  involved,  but  also  an  interesting  and 
very  important  chapter  of  monetary  history. 


THE   SPREAD    OF   MONOMETALLISM  251 

simple  than  bimetallism.  It  avoids  all  the  difficulties  that 
we  have  just  enumerated.  Then  why  not  adopt  it? 

That  is  what  has  been  done  by  the  greater  number  of 
nations:  first  England  (1816),  then  Portugal  (1854),  Ger- 
many (1873),  Norway,  Sweden,  and  Denmark  (1875),  Fin- 
land (1878),  Roumania  (1890),  Austria-Hungary  (1892), 
Russia  (1897),  Japan  (1897),  and  Peru  (1897).  The  gold 
standard  prevails  also  in  Egypt  and  Turkey.  Alt  the  South 
American  countries  except  Bolivia  and  Paraguay  have  adopted 
it,  but  most  of  them  are  in  reality  under  the  regime  of  irre- 
deemable paper  money.  The  only  important  countries  hav- 
ing bimetallism  are  the  United  States,  the  Latin  Union 
(comprising  France,  Italy,  Belgium,  Switzerland,  and  Greece), 
Holland,  and  Spain.  The  only  countries  of  importance  which 
have  the  silver  standard  are  China  and  Mexico.  The  latter 
has  the  double  standard  in  law  but  the  single  silver  standard 
in  practice ;  the  same  is  true  of  the  Central  American  states, 
except  Costa  Rica,  which  has  the  gold  standard. 

Of  the  bimetallist  countries  mentioned  above,  the  principal 
ones  are  in  reality  gold  monometallist,  in  the  sense  that  they 
employ  only  gold  for  international  exchange.  Such  is  the 
case  for  the  United  States,  France,  and  Holland.  We  have 
seen  that  it  is  a  very  feeble  tie  indeed  which  binds  the  Latin 
Union  to  a  legal  bimetallism  that  is  little  more  than  nominal. 
The  same  is  true  of  the  United  States,  where  the  friends  of 
silver  have  endeavored  to  establish  real  bimetallism  and  to 
lead  to  its  adoption  by  other  nations.  It  was  through  their 
influence  that  the  Sherman  Act  of  1890  was  passed,  obliging 
the  government  to  purchase  a  large  amount  of  silver  each 
month.  We  have  seen  that  this  law  was  repealed  in  1893 
and  that  the  law  of  March  14, 1900,  expressly  states  that  the 
gold  dollar  is  the  standard  unit  of  value,  although  the  legal- 
tender  quality  of  the  silver  dollar  remains  unaltered. 

Why  do  these  nations  not  cut  the  tie  that  binds  them  so 
slightly  to  bimetallism,  and  adopt  monometallism,  as  other 
nations  have  done  ?  There  are  two  difficulties  in  the  way  of 


252  PRINCIPLES    OF   POLITICAL   ECONOMY 

this  step,  one  a  practical  matter  of  cost  and  the  other  a 
matter  of  principle. 

(1)  The   practical   difficulty  is  that  the  adoption  of   the 
gold  standard  means  the  demonetization  of   silver.     For  if 
silver  dollars  are  not  legal  tender,  they  must,  at  least  in  part, 
be  withdrawn  from  circulation.     It  is  estimated  that  there 
are  in   this  country  over  500,000,000  silver  dollars,  whose 
metallic  value  is  less  than  half   their  legal   value.     Their 
withdrawal  would  therefore   cost   $250,000,000,  and   proba- 
bly more,  since  such  a  measure  as  this  evidently  would  cause 
a  further  fall  in  the  value  of  silver.1 

(2)  The  objection  on  principle  is  that  fluctuations  in  prices 
are  much  more  to  be  feared  with  a  single  standard  of  values 
than  with  a  double  standard.     We  know  that  every  fluctua- 
tion in  the  value  of  money  immediately  results  in  an  inverse 
fluctuation  in  prices.     (See  page  223.)     When  there  is  but 
one  money,  it  is  to  be  feared  that  these  fluctuations  will  be 
frequent  and  abrupt,  throwing  the  whole  economic  mechanism 
out  of  gear  and  continually  provoking  crises. 

When,  on  the  other  hand,  two  moneys  are  used  for  the 
measurement  of  values,  there  arises  a  sort  of  compensatory 
influence  of  the  two  standards,  which  is  very  favorable  to  the 
stability  of  prices  and  therefore  to  the  prosperity  of  trade ; 
for  in  business,  stability  is  of  the  highest  importance.  It  is 
somewhat  difficult  to  explain  this  compensatory  influence,  but 
its  main  significance  is  not  hard  to  grasp. 

Let  us  simply  recall  that  the  principal  cause  of  the  superior- 
ity of  the  precious  metals  as  the  measure  of  values  consists 

1  It  might  be  suggested  that  the  government  should  let  the  holders  sustain 
the  loss.  But  this  would  hardly  be  honorable  conduct  on  the  part  of  the 
government,  which  has  guaranteed  the  value  of  these  coins  by  putting  its  seal 
upon  them.  As  a  matter  of  fact  the  silver  dollars,  not  having  met  with  much 
favor  as  a  medium  of  exchange,  do  not  circulate  very  extensively.  Their  place 
is  taken  by  "silver  certificates"  which  are  redeemable  on  demand  in  coin 
deposited  in  the  Treasury  of  the  United  States.  These  certificates,  especially 
since  the  issue  of  1886  in  denominations  of  §1,  $2,  and  $5,  have  a  wide  circu- 
lation; the  amount  in  circulation  October  1,  1902,  was  nearly  $460,000,000. 


MERITS   OF  BIMETALLISM  253 

in  the  fact  that  their  variations  in  quantity  are  small  when 
compared  with  the  total  amount  in  existence  at  any  given 
time.  (See  page  217.)  The  degree  of  this  superiority,  due 
to  stability  of  value,  depends  on  the  supply  of  the  metal  and 
the  variety  of  sources  which  augment  it.  When  this  supply 
consists  of  two  metals,  it  will  necessarily  be  much  larger  to 
begin  with.  It  is,  moreover,  highly  improbable  that  the  cir- 
cumstances which  give  rise  to  a  great  increase  in  the  produc- 
tion of  one  metal  will  simultaneously  cause  a  great  increase 
in  the  production  of  the  other ;  hence  variations  in  the  total 
quantity  will  not  be  so  great  or  so  perceptible.  Rises  in  the 
level  of  a  river  are  unlikely  to  be  sudden  or  dangerous  when 
its  tributaries  are  numerous,  and  situated  in  regions  that  are 
far  distant  from  each  other  and  entirely  different  in  geologi- 
cal and  climatic  features.  Similarly,  it  is  better  that  our 
supply  of  metal  be  fed  by  two  sources  —  gold  and  silver  — 
than  by  only  one.  If  there  were  three  or  four  sources,  that 
would  be  still  better,  and  ^>0fo/-metallism  would  be  more 
desirable  than  fo'-metallisrn !  If  in  the  fifties  there  had  been 
but  one  monetary  metal  —  gold  —  the  discovery  of  gold  mines 
in  California  and  Australia  would  have  caused  the  utmost  dis- 
turbance through  an  enormous  rise  in  prices.  Indeed,  such 
may  some  day  be  the  effect  of  gold  production  in  the  Klon- 
dike and  the  Transvaal.  The  exhaustion  of  gold  mines  would 
cause  an  even  more  formidable  perturbation. 

Whether  prices  are  high  or  low  does  not  matter  much  ;  but  it  is 
of  the  highest  importance  that  prices  shall  not  rise  or  fall  abruptly. 

It  is  also  desirable  that  the  value  of  money  shall  tend  in  gen- 
eral to  fall  rather  than  to  rise,  because  a  continual,  gradual 
reduction  of  the  power  of  money  acts  as  a  social  equalizer; 
it  stimulates  the  activity  of  those  that  live  on  indepen- 
dent incomes,  it  relieves  debtors,  and  it  tends  to  diminish  the 
advantage  of  persons  having  money  over  those  that  possess 
none.  But  when  there  is  only  one  metal,  it  is  probable  that 
the  value  of  money  will,  on  the  contrary,  tend  to  rise. 

Bimetallists  are  not  only  unwilling  to  abandon  the  double 


254  PRINCIPLES    OF    POLITICAL   ECONOMY 

standard,  but  they  also  endeavor  to  convert  the  gold-standard 
nations,  and  maintain  that  none  of  the  difficulties  that  are 
feared  would  arise  if  bimetallism  were  adopted  by  interna- 
tional agreement  among  the  great  powers,  on  the  basis  of 
16  to  1  or  on  the  basis  of  any  other  fixed  ratio.  This 
assertion  seems  preposterous  to  the  economists  of  the  clas- 
sical school.  They  declare  that  the  relative  values  of  gold 
and  silver  do  not  and  can  not  depend  ne  varietur  on  the  will 
of  any  government,  or  even  on  the  will  of  all  governments  com- 
bined, any  more  than  the  respective  values  of  oxen  and  sheep, 
or  of  wheat  and  oats.  The  value  of  things  is  regulated  solely 
by  the  law  of  demand  and  supply,  and  is  wholly  beyond  the 
scope  of  legislative  control.  The  precious  metals,  they  assert, 
are  no  exception  to  the  rule. 

In  our  opinion,  this  line  of  argument  adopted  by  the  clas- 
sical school  requires  some  qualification.  Gold  and  silver, 
being  used  principally  for  money,  are  not  commodities  that 
may  be  likened  to  oxen  or  sheep  or  any  other  merchandise. 
When,  therefore,  we  speak  of  the  demand  for  precious 
metals,  we  mean  almost  exclusively  the  demand  made  by  a 
dozen  or  more  government  Mints.  Hence  there  is  nothing 
absurd  in  the  supposition  that  if  these  dozen  buyers  should 
agree  among  themselves  to  fix  the  price  of  gold  and  of  silver, 
they  could  succeed  in  so  doing.  If  they  declare  that  they  will 
all  buy  gold  at  the  rate  of  $240  per  pound  Troy,  and  silver 
at  115  per  pound  Troy,  it  is  highly  probable  that  they  will 
impose  this  price  on  the  market.  The  classical  school  says 
that  it  would  be  absurd  to  decree  that  an  ox  shall  always  be 
worth  ten  sheep,  or  that  a  bushel  of  wheat  shall  be  worth 
the  same  as  two  bushels  of  oats !  Certainly  it  would ;  the 
market  for  these  commodities  is  immense,  and  each  one  of  us, 
by  his  tastes  and  desires,  helps  to  regulate  the  current  prices 
of  these  goods.  But  if  in  the  whole  world  there  were  only 
a  dozen  people  who  consumed  beef  or  mutton,  it  is  highly 
probable  that  by  concerted  action  they  could  fix  prices  at 
the  ratio  of  1  to  10,  or  at  any  other  ratio  that  pleased  them. 


INTERNATIONAL   BIMETALLISM  255 

Such  a  result  as  this  is  in  fact  accomplished,  in  spite  of 
far  less  favorable  conditions,  by  commercial  speculators  and 
large  dealers,  who  combine  with  one  another  in  trusts  and 
similar  organizations,  and  who  sometimes  arbitrarily  deter- 
mine prices.1 

No  doubt  this  line  of  argument  must  not  be  carried  to 
absurd  extremes.  It  is  manifestly  not  in  the  power  of  gov- 
ernments, even  were  they  unanimous,  to  decree  that  the 
ratio  between  gold  and  silver  henceforth  shall  be  equality, 
or  that  it  shall  be  reversed  and  that  a  pound  of  silver  shall 
be  worth  more  than  a  pound  of  gold.  Such  a  decree  would 
be  a  dead  letter,  because  the  industrial  use  of  the  precious 
metals,  though  less  important  than  their  use  as  money,  never- 
theless must  not  be  neglected;  this  circumstance  would  be 
sufficient  to  prevent  the  choice  of  an  extraordinary  ratio. 
All  the  governments  in  the  world  could  not  make  silver 
worth  as  much  as  gold ;  men  and  women  would  never  con- 
sent to  pay  as  much  for  a  silver  ring  as  for  a  gold  one.2 

But  within  reasonable  limits  we  do  not  hesitate  to  believe 
that  an  international  agreement  would  be  efficacious  in 
determining  the  relative  values  of  the  two  metals,  and  con- 
sequently in  eliminating  the  principal  disadvantage  of  bimet- 
allism ;  namely,  the  disappearance  of  one  of  the  two  metals. 

1  We  could  give  numerous  proofs  of  the  influence  exerted  by  law  on  the 
prices  of  precious  metals  ;  for  instance,  the  stability  of  the  ratio  between  the 
two  metals  during  nearly  three-quarters  of  a  century  in  France  ;  or,  contrari- 
wise, the  fall  of  silver  caused  by  its  demonetization  in  Germany,  later  aggra- 
vated by  the  agreement  that  suppressed  its  coinage  in  the  Latin  Union,  and, 
recently,  its'  continued  depreciation  because  of  the  discontinuance  of  silver 
coinage  in  British  India. 

2  Let  us  add  that  if,  upon  this  hypothesis,  the  values  of  gold  and  of  silver 
were  successfully  maintained  at  the  same  level,  the  gold  mines  would  soon 
be  abandoned  because  the  cost  of  production  of  gold  is  much  greater  than 
that  of  silver.     Hence  such  a  measure  would  cause  the  production  of  silver  to 
increase  very  rapidly,  whereas  the  gold  mines  would  soon  be  abandoned  be- 
cause they  would  bring  no  profits.     Thus,  sooner  or  later,  the  production  of 
gold  would  cease.     Similarly,  if  the  law  should  declare  that  an  ox  shall  be 
worth  no  more  than  a  sheep,  and  this  basis  of  values  were  successfully  en- 
forced, we  may  be  sure  that  no  one  would  continue  to  raise  oxen. 


256  PRINCIPLES   OF   POLITICAL   ECONOMY 

For  whither  could  it  disappear,  when  in  all  countries  it  is 
subject  to  the  same  law  ? 

Is  such  an  international  agreement  as  this  practically  pos- 
sible ?  That  is  another  question.  It  does  not  appear  so,  in 
view  of  the  fact  that  all  nations  seem  to  regard  it  as  a  mat- 
ter of  national  honor  to  adopt  and  maintain  the  gold  stand- 
ard. Moreover,  the  nations  that  have  adopted  a  legal  ratio 
for  the  two  metals  did  not  establish  the  same  ratio,  —  in 
Austria-Hungary  it  was  fixed  at  1  to  18.22,  in  Russia  1  to 
23.25,  and  in  Japan  1  to  33  J.  Besides,  the  English  govern- 
ment, whose  cooperation  is  regarded  as  indispensable,  has 
always  rejected  the  idea  of  international  bimetallism. 

The  best  plan  for  the  bimetallist  countries  appears  to  be 
the  one  they  have  adopted ;  namely,  the  maintenance  of  the 
statu  quo.  About  ten  years  ago,  when  the  production  of 
gold  was  decreasing  rapidly,  this  policy  involved  some  dan- 
ger. The  question  then  arose  whether  there  would  be 
enough  gold  for  all  the  nations  desiring  to  employ  it  as  their 
monetary  standard,  and  whether  those  who  delayed  in  adopt- 
ing it  might  not  discover  that  they  had  entered  the  field  too 
late;  but  in  the  last  part  of  the  nineteenth  century  the 
output  of  gold  increased  very  considerably,  and  there  is 
every  reason  to  believe  that  its  increase  will  continue  with 
a  rapidity  proportionate,  or  more  than  proportionate,  to  that 
of  silver.1  For  this  reason  the  difference  in  the  value  of  the 

1  In  ten  years  the  annual  production  of  gold  has  been  tripled,  princi- 
pally by  the  South  African  mines.  The  world's  annual  production,  which 
in  1883  fell  below  $100,000,000,  rose  in  1899  to  over  $300,000,000.  It  is  true 
that  the  South  African  War  considerably  reduced  the  output  of  the  last  few 
years  ;  but  the  construction  of  the  great  trans-Siberian  railroad  will  proba- 
bly increase  the  output  of  the  Siberian  gold  mines.  The  access  to  very  rich 
but  hitherto  almost  inaccessible  gold  deposits  in  Alaska  is  being  facili- 
tated, and  many  auriferous  districts  are  being  discovered  in  various  parts  of 
Africa.  The  placer-gold  yield  of  the  Klondike  (Yukon)  increased  from 
$2,500,000  in  1897  to  $16,000,000  in  1899. 

The  production  of  silver  has  of  course  also  increased  enormously,  so  that 
it  is  difficult  to  tell  which  of  the  two  metals  will  fall  more  rapidly  in  value. 
(See  page  228.) 


INTERNATIONAL   BIMETALLISM  257 

two  metals  will  probably  decrease,  and  a  change  will  take 
place  opposite  to  that  of  1870-1895.  Hence  the  problem  of 
bimetallism  has  lost  much  of  its  acuteness.  There  is  no 
immediate  peril  for  the  bimetallist  nations  in  remaining 
bimetallist,  and  if  they  should  decide  later  to  adopt  gold 
monometallism,  this  step  will  be  less  difficult  then  than  now. 
The  solution  of  the  monetary  problem  is  every  day  becoming 
easier  and  less  urgent. 

Yet  as  gold  has  become  practically  the  sole  international 
money,  the  bimetallist  nations  must  see  to  it  that  they  possess 
a  sufficient  stock.1  If  they  fail  to  do  this,  they  will  be 
obliged  to  resort  to  the  expensive  process  of  purchasing  gold 
with  which  to  make  payments  abroad.  (See  the  section  on 
Foreign  Exchange.) 

1  To  attain  this  object,  several  countries  (Russia  a  few  years  ago,  and 
now  Spain)  require  that  customs  duties  be  paid  in  gold  coin. 


CHAPTER  III  — PAPER  MONEY 

I.   Whether  Metallic  Money  can  be  replaced  by 
Paper  Money 

DID  we  not  already  know  that  paper  money  could  be  sub- 
stituted for  metallic  money,  we  might  have  some  difficulty 
in  believing  it  possible,  and  the  title  of  this  section  would 
cause  some  surprise. 

It  is  manifestly  impossible  to  substitute  for  wheat  or  coal 
or  wealth  of  any  other  kind  mere  pieces  of  paper  on  which 
are  inscribed  such  words  as  "  One  Hundred  Bushels  of 
Wheat"  or  "One  Hundred  Tons  of  Coal."  Such  pieces 
of  paper  could  not  provide  either  food  or  warmth.  If,  more- 
over, we  used  coins  merely  to  hang  around  our  necks,  as 
Oriental  women  wear  their  gold  or  silver  sequins,  even  then 
our  scraps  of  paper  would  be  useless  as  substitutes  for  me- 
tallic money.  But  we  know  that  money  is  unlike  any  other 
wealth,  and  that  in  our  civilized  societies  its  utility  is  not 
of  a  material  nature.  A  piece  of  money  is  nothing  but  an 
"  order "  giving  its  possessor  the  right  to  claim,  under  cer- 
tain conditions,  a  share  of  existing  wealth.  (See  page  220.) 
The  part  played  by  an  "order"  can  be  taken  by  a  piece  of 
paper  quite  as  well  as  by  a  piece  of  metal.  To  the  financier 
Law,  whose  premature  experiments  led  France  into  bank- 
ruptcy, is  due  the  credit  of  having  perfectly  understood  and 
demonstrated  this  possibility. 

The  subject  will  be  clearer  if  we  distinguish  three  kinds  of 
paper  money  :  — 

(1)  Representative  paper  money  is  that  which  merely  rep- 
resents an  amount  of  coin  that  has  been  deposited  some- 
where,—  say  in  the  safes  of  a  bank.  This  kind  of  paper 


KINDS  OP  PAPER  MONEY  259 

money  is  thus  secured  by  the  coins  for  which  the  paper  is 
simply  a  substitute.1  Our  American  gold  and  silver  certifi- 
cates, guaranteed  by  gold  and  silver  deposits  in  the  Treasury 
of  the  United  States,  are  good  examples  of  this  kind  of  paper 
money.  Gold  coin,  especially  in  large  amounts,  is  cumber- 
some and  difficult  to  handle;  hence  the  Secretary  of  the 
Treasury  has  been  authorized  to  receive  deposits  of  gold  coin 
in  sums  of  not  less  than  $20  and  to  issue  certificates  therefor. 
These  certificates  are  essentially  receipts  which  show  that  so 
many  dollars  in  gold  coin  have  been  deposited  with  the  Treas- 
urer of  the  United  States,  and  that  the  holder  of  the  certifi- 
cate is  entitled  to  receive  them  on  demand.  Gold  certificates, 
however,  are  not  legal  tender,  but  are  receivable  for  customs, 
taxes,  and  all  public  dues.  On  October  1,  1902,  about  $300,- 
000,000  worth  of  these  certificates  were  in  circulation.  Silver 
is  even  more  cumbersome  than  gold,  and  a  plan  for  substitut- 
ing certificates  was  authorized  by  the  laws  of  1878, 1886,  and 
1900.  On  October  1, 1902,  about  $460,000,000  worth  of  these 
certificates  were  in  circulation.  Like  gold  certificates,  they 
are  receivable  for  all  public  dues,  but  are  not  legal  tender.  — 
This  form  of  paper  money  seems  to  present  no  difficulties. 

(2)  Fiduciary  paper  money  is  that  which  takes  the  form 
of  credit  instruments.  It  is,  properly  speaking,  a  promise  to 
pay  a  certain  sum  of  money.  It  is  evident  that  the  value  of 
the  paper  depends  on  the  solvency  of  the  debtor.  If  perfect 
trust  can  be  placed  in  his  ability  to  pay ;  if,  in  other  words, 
the  signature  and  promise  is  reliable,  there  is  no  reason 
why  this  paper  should  not  circulate  as  easily  as  money.  We 
shall  see  that  bank  notes  usually  fall  in  this  category,  except 
in  certain  cases  which  we  shall  mention  hereafter.  The 

1  "One  of  the  earliest  mediums  of  exchange,"  says  Jevons,  " consisted  of 
the  skins  of  animals.  The  earliest  form  of  representative  money  consisted  of 
small  pieces  of  leather,  usually  marked  with  an  official  seal.  It  is  a  very  rea- 
sonable suggestion  that  when  skins  and  furs  began  to  be  found  an  inconven- 
iently bulky  kind  of  money,  small  pieces  were  clipped  off,  and  handed  over 
as  tokens  of  possession.  By  fitting  into  the  place  from  which  they  were  cut, 
they  would  prove  ownership.1' 


260  PRINCIPLES    OF    POLITICAL   ECONOMY 

"national  banks"  of  the  United  States  issue  money  of  this 
sort,  guaranteed  by  government  bonds  deposited  with  the 
Treasurer  of  the  United  States.  There  were,  on  October  1, 
1902,  national  notes  in  circulation  to  the  amount  of  over 
$350,000,000. 

Fiduciary  money  (or,  as  it  is  sometimes  called,  redeemable 
or  convertible  money),  when  issued  by  the  government,  is 
secured  only  by  the  general  solvency  of  the  treasury  depart- 
ment, and  not  by  a  specific  deposit,  dollar  for  dollar.  Presi- 
dent Hadley  says :  "  Experience  proves  that  this  is  not  nearly 
so  safe  a  reliance  as  that  on  which  the  coin  certificate  is 
based.  ...  At  the  very  best,  there  is  danger  that  the  assets 
on  which  the  government  relies  for  the  payment  of  such  notes 
will  fail  in  an  emergency.  .  .  .  The  assets  of  the  government 
are,  for  the  most  part,  permanent  investments  of  a  kind  which 
it  is  not  easy  to  sell  at  short  notice.  When  a  fiscal  emer- 
gency arises,  the  dangerous  power,  possessed  by  the  legis- 
lature, of  declaring  such  notes  a  legal  tender  even  if  they  are 
not  redeemed,  is  a  constant  menace  to  financial  stability."1 

(3)  Conventional  paper  money  represents  nothing  and  con- 
fers a  claim  to  nothing.  The  name  "  paper  money,"  in  its 
strict  sense,  is  generally  confined  to  this  category.  It  con- 
sists of  strips  of  paper  issued  by  a  government  having  insufi> 
cient  metallic  money.  These  strips  of  paper,  to  be  sure,  bear 
such  inscriptions  as  "  Ten  Dollars  "  or  "  Twenty  Dollars," 
and  thus,  like  the  preceding  kinds  of  paper  money,  have  the 
appearance  of  promises  to  pay  certain  sums  of  money.  But 
every  one  knows  that  this  is  pure  fiction,  and  that  the  gov- 
ernment will  never  redeem  these  promises,  because  it  has  no 
money  for  that  purpose. 

Conventional  paper  money  (also  called  irredeemable  or 
inconvertible  paper  money  because  there  is  no  provision  on 
the  part  of  the  government  to  redeem  it  or  exchange  it  for 
coin)  may  be  regarded  as  money  on  which  the  government 
has  charged  approximately  a  hundred  per  cent  seigniorage. 
1  A.  T.  Hadley,  "Economics,"  page  191.  (Putnam,  1898.) 


INCONVERTIBLE  PAPER  MONEY  261 

This  kind  of  money  either  is  issued  as  such  directly  by  the 
State,  or  is  the  result  of  the  degeneration  of  money  that  was 
originally  convertible.  Convertible  money  sometimes  loses 
the  quality  of  convertibility,  or  possesses  it  only  to  a  limited 
extent,  and  thus  becomes  inconvertible.  "The  paper  may  be 
declared  to  be  redeemable  in  coin ;  that  promise  may  even  be 
borne  upon  the  surface  of  the  paper ;  but  if  provision  be  not 
made  so  that,  in  fact,  every  holder  of  a  note  can  obtain  coined 
money  therefor  at  will,  the  paper  is  inconvertible.  No  paper 
money  is  convertible,  the  full,  immediate  and  unconditional 
redemption  of  which  is  not,  at  all  times,  within  the  choice  of 
the  holder."1 

It  is  especially  in  this  third  form  that  the  substitution  of 
paper  money  for  metallic  money  seems  hard  to  understand ; 
certainly  it  is  not  a  very  simple  matter.  It  has,  however, 
frequently  been  accomplished  in  many  countries ;  experience 
has  amply  proved  that  the  substitution  is  possible,  and  that 
the  public  will  readily  submit  to  the  process.  Russia  and  the 
South  American  Republics  have  applied  this  system  for  many 
generations.  Why  should  they  not?  If,  by  the  decree  of  the 
lawgiver  and  the  consent  of  the  public  (which  to  a  certain 
extent  is  always  necessary  for  the  acceptance  of  legislative 
decrees),  these  strips  of  green,  white,  or  blue  paper  have  the 
power  to  pay  for  goods,  to  liquidate  debts,  and  to  pay  taxes, 
why  should  they  not  circulate  just  as  well  as  white  or  yellow 
coins  ?  Do  they  not  serve  the  very  same  purposes  as  coins  ? 

Yet  we  must  admit  that  between  the  value  of  paper  money 

1  Francis  A.  Walker,  "Political  Economy,"  page  153. 

The  "greenbacks"  and  "confederate  notes"  issued  during  the  Civil  War 
are  examples  of  this  kind  of  paper  money.  For  seventeen  years,  i.e.' from 
1862  to  1879  the  greenbacks  were  not  worth  their  face  value;  in  1864  it 
took  two  dollars  and  eighty-five  cents  of  paper  to  buy  one  dollar  of  gold. 
The  government  did  not  begin  to  redeem  them  until  1879. 

The  step  from  putting  out  promises  to  pay  that  are  not  redeemable,  to 
issuing  paper  that  the  government  does  not  even  pretend  to  redeem,  is  an 
easy  one,  and  many  are  the  governments  which  have  taken  it.  Money  of  the 
latter  sort  is  called  fiat  money.  In  the  colony  of  Rhode  Island,  for  instance, 
the  issues  read  as  follows :  "  This  bill  shall  be  equal  to  money." 


262  PRINCIPLES    OF    POLITICAL    ECONOMY 

and  that  of  metallic  money  there  will  always  be  several  im- 
portant differences.  The  value  of  the  former  is  always  more 
precarious,  more  restricted,  and  more  changeable.  We  shall 
briefly  explain  each  of  these  three  defects. 

(A)  The  value  of  paper  money  is  precarious  because  it  is 
dependent  on  the  will  of  the  legislator  and  can  be  annihilated 
as  well  as  created  by  law.  Should  the  law  demonetize  paper 
money,  the  holder  will  have  in  his  possession  nothing  but 
bits  of  paper,  for  when  paper  money  has  lost  its  legal  value 
it  has  lost  all.  The  same  thing  is  not  altogether  true  of 
metallic  money ;  for  besides  its  legal  value  it  has  also  a  natu- 
ral value  due  to  the  physical  and  chemical  properties  of  the 
metal  it  contains.  Doubtless  if  gold  and  silver  were  de- 
monetized in  all  countries,1  metallic  money  would  lose  the 
greater  part  of  its  value.  Let  us  not  be  deceived  in  this 
respect.  The  fall  in  the  value  of  silver  money,  caused  by 
its  demonetization  in  several  countries,  is  more  than  sufficient 
proof  of  our  assertion.2  Nevertheless,  even  though  the  pre- 
cious metals  were  demonetized  everywhere,  they  would  still 
possess  utility  and  value,  because  they  could  be  employed  for 
industrial  purposes  ;  and  as  this  employment  of  them  would 

1We  say  "in  all  countries "  because  if  it  were  demonetized  in  only 
one,  there  would  be  no  perceptible  decrease  in  its  value.  This  is  the 
circumstance  that  offers  the  holder  of  metallic  money  the  greatest  security. 

2  Many  economists,  however,  harbor  an  illusion  in  this  respect,  or,  at  least, 
do  not  put  their  readers  on  their  guard  against  it.  Most  of  them  imply  that 
the  government  seal  impressed  on  gold  and  silver  coins  merely  indicates  their 
value  in  much  the  same  way  that  store-keepers  put  a  mark  on  goods.  But 
the  declaration  that  the  232.20  grains  of  fine  gold  and  25.80  grains  of  alloy 
constituting  our  "eagle"  are  worth  ten  dollars,  not  only  is  declaratory 
of  value  but  also  determinative  of  value.  These  metals  have  acquired  the 
larger  part  of  their  value  because  the  will  of  the  legislator,  ratified  (as  it 
were)  by  the  will  of  society,  has  chosen  gold  and  silver  as  money  ;  they  would 
lose  half,  and  probably  more,  of  their  value,  as  soon  as  this  sanction  or  this 
ratification  should  cease  to  exist.  Aristotle  very  clearly  perceived  this,  when 
he  said,  in  the  "  Nicomachean  Ethics,"  Book  V  :  "It  was  by  virtue  of  a  volun- 
tary agreement  that  money  became  the  instrument  of  exchange.  ...  It  is 
called  v6fju<r/j.a,  from  the  word  j>6/*os,  signifying  law,  which  indicates  that  it  is 
founded,  not  on  nature,  but  on  convention  ;  and  that  human  laws,  which 


DEFECTS  OF  PAPER  MONEY  263 

increase  with  the  fall  in  their  value,  it  is  possible  that  the 
decline  in  value  would  be  smaller  than  we  anticipate.  Sup- 
pose that  the  metals  fell  to  a  third  or  a  fourth  of  their  present 
value.  The  holder  of  metallic  money  then  would  still  possess 
a  certain  amount  of  value  of  which  no  law  could  deprive 
him,  and  this  amount  would  probably  be  higher  than  it  could 
have  been,  had  any  other  commodity  been  chosen  as  legal 
money. 

(B)  The  value  of  paper  money  is  more  restricted,  that  is  to 
say,  its  circulation  is  limited  to  a  narrower  area  than  metallic 
money.  As  its  value  is  conferred  upon  it  by  the  laws  of  a 
particular  nation,  it  cannot  be  expected  to  circulate  beyond 
the  boundaries  of  that  nation.1  It  cannot,  therefore,  be 
employed  in  international  exchange.  The  value  of  metallic 
money,  on  the  other  hand,  being  determined  by  that  of  the 
metal  it  contains,  is  approximately  the  same  in  all  civilized 
nations.  Therefore  it  can  circulate  everywhere,  —  if  not  as 

have  thought  fit  to  employ  it  as  a  measure  of  value,  may,  at  pleasure,  set 
this  use  of  it  aside,  and  employ  some  other  measure  in  its  stead." 

But  we  must  not  therefore  conclude,  as  some  economists  (notably  Cernu- 
schi)  have  done,  that  the  value  of  the  precious  metals  is  purely  conventional. 
In  order  that  any  object  shall  have  a  recognized  utility  and  value,  it  is  of 
course  necessary  that  the  will  and  choice  of  men  be  directed  toward  this  ob- 
ject ;  but  human  will  and  choice  are  in  this  case  determined  by  natural 
causes,  and  therefore  the  resulting  value  is  also  natural  and  by  no  means 
purely  conventional.  The  choice  of  men  in  singling  out  the  precious  metals 
for  this  purpose  was  not  arbitrary,  but  due  to  definite  qualities  which  the 
precious  metals  possessed,  and  which  we  have  already  pointed  out.  Even 
wheat  owes  its  value  to  the  fact  that  most  civilized  men  have  chosen  this 
cereal  among  all  others  as  their  staple  food ;  and  if  ever  they  substituted 
another,  we  may  say  that  the  value  of  wheat  would  decline.  But  no  one 
would  therefore  maintain  that  the  value  of  wheat  is  purely  conventional. 
It  is  the  same  with  the  precious  metals.  The  only  difference  is  that  it  is 
easier  to  use  something  else  as  money,  than  to  find  a  food  to  substitute  for 
wheat. 

1  It  is  of  course  true  that  American  paper  money  will  be  accepted  by 
bankers  abroad,  or  by  foreigners  who  are  familiar  with  our  currency.  Bat  in 
this  case  it  is  received  not  as  money  properly  speaking,  but  as  an  instrument 
of  credit,  i.e.  with  the  intention  of  having  it  cashed,  just  as  a  note  signed  by 
Rothschild  would  be  accepted  in  any  country. 


264  PRINCIPLES   OF   POLITICAL   ECONOMY 

coined  money,  at  least  as  bullion.  This  is  the  reason  why 
metallic  money  is  essentially  a  universal  and  international 
money,  while  paper  money  is  essentially  national. 

(C)  Finally,  the  value  of  paper  money  is  more  changeable 
than  that  of  metallic  money,  for  the  excellent  reason  that  the 
quantity  of  paper  money  depends  solely  on  the  will  of  the 
government,  while  the  quantity  of  metallic  money  depends 
on  natural  resources,  —  principally  on  the  discovery  of  new 
mines.  The  former,  therefore,  is  issued  by  man,  the  latter 
by  nature.  An  imprudent,  careless  government  can  depre- 
ciate paper  money  by  issuing  more  than  is  needed,  and 
too  often  this  is  exactly  what  occurs.  But  no  government 
on  earth  can  depreciate  metallic  money  in  this  manner. 
Supposing  that  the  government  is  prudent  enough  to  issue 
only  a  limited  quantity  of  paper  money,  this  cannot  remove 
the  disadvantage  to  which  we  refer,  inasmuch  as  the  need 
for  money  varies  from  time  to  time  and  according  to  circum- 
stances. It  frequently  happens,  for  example,  that  a  period 
of  great  business  activity  requiring  an  increase  in  the  in- 
struments of  exchange  is  followed  by  a  period  of  depression. 
There  may  have  been  no  change  in  the  amount  of  money  ; 
yet  in  the  first  period  there  will  probably  be  a  dearth,  while 
in  the  second  period  there  is  liable  to  be  an  excess  of  paper 
money. 

It  is  true  that  the  discovery  of  exceptionally  rich  gold 
and  silver  mines  may  at  any  time  throw  a  large  amount  of 
precious  metals  on  the  world's  market,  and  thus  cause  a  fall 
in  the  value  of  metallic  money.  It  is  also  true  that  when  a 
period  of  depression  follows  a  period  of  great  activity,  even 
the  metallic  money  which  has  been  drawn  into  a  country  may 
prove  to  be  excessive  in  amount.  This  has  occurred  more 
than  once.  But  these  variations  are  never  so  great  as  those 
due  to  changes  in  the  quantity  of  paper  money.  The  pre- 
cious metals  are  sought  and  accepted  everywhere,  and  if  they 
are  in  excess  in  one  country  they  naturally  flow  into  others. 
Sudden  increases  in  the  amount  of  paper  money,  however, 


IS   PAPER   MONEY   WEALTH?  265 

being  always  confined  within  the  limits  of  one  nation  (which 
may  be  regarded  as  a  reservoir  from  which  there  is  no  out- 
let), always  have  disastrous  consequences. 

The  above  three  disadvantages,  which  render  paper  money 
so  imperfect  an  instrument  when  compared  with  metallic 
money,  would  vanish  almost  entirely  if  all  civilized  countries 
should  bind  themselves  :  — 

(1)  To  confer  the  legal  tender  quality  on  only  one  kind  of 
money, — paper  money  which  shall  be  accepted  everywhere. 

(2)  Not  to  augment  its  quantity,  or,  to  augment  it  only  in 
a  measure  fixed  in  advance  and  calculated  for  each  nation,  — 
perhaps  according  to  the  increase  of  its  population. 

In  this  case  the  value  of  paper  money,  though  still  con- 
ventional or  artificial,  would  rest  on  almost  as  broad  a  basis 
as  the  value  of  metallic  money  itself,  because  it  would  be 
founded  on  the  unanimous  consent  of  all  nations.  As  its 
quantity  would  be  regulated  according  to  scientific  forecasts, 
and  not  by  mere  chance,  its  value  would  probably  be  subject 
to  little  variation.  Indeed,  it  is  likely  that  the  money  of  the 
future  will  be  of  this  kind. 

The  fact  that  paper  money  is  artificial  money  is  by  no 
means  a  sign  of  inferiority.  Quite  the  contrary !  A  watch 
is  an  artificial  instrument  for  measuring  time,  while  the  sun 
is  a  natural  instrument;  this  circumstance  does  not  prevent 
the  former  from  being,  for  this  purpose,  superior  to  the  latter. 
It  is  even  a  characteristic  feature  of  progress  that  natural 
instruments  are  replaced  by  artificial  ones :  the  rude  club 
by  the  rifle,  the  horse  by  the  locomotive,  sunlight  by  electric 
light,  the  warmth  of  the  sun  by  artificial  heat. 

II.   Whether  the  Creation  of  Paper  Money  is  equiva- 
lent to  the  Creation  of  Wealth 

The  men  who  first  conceived  the  idea  of  making  paper 
money1  flattered  themselves  that  they  were  increasing  the 

1  We  do  not  know  who  invented  paper  money.  It  was  known  in  China 
from  time  immemorial.  Marco  Polo  described  it  on  his  return  from  that 


266  PRINCIPLES    OF    POLITICAL   ECONOMY 

general  wealth,  just  as  if  they  had  discovered  a  gold  mine  or 
accomplished  the  magnum  opus  of  which  the  ancient  alche- 
mists had  dreamed,  namely,  the  transmutation  of  the  baser 
metals  into  gold. 

This  idea  was  evidently  absurd,  for  it  assumed  that  wealth 
can  be  created  out  of  nothing.  Yet  the  idea  has  been  ridi- 
culed too  much,  inasmuch  as  it  is  perfectly  true  that  the 
emission  of  paper  money  can  to  some  extent  increase  the 
wealth  of  a  nation.  How  can  it  do  this  ?  Adam  Smith  first 
offered  an  explanation.  He  observed  that  the  metallic  money 
circulating  in  a  country  is  unproductive  capital,  and  that  the 
substitution  of  paper  money,  by  removing  this  capital  from 
commerce  and  making  it  available  for  other  uses,  permits  its 
application  to  productive  purposes.  In  a  comparison  that 
has  since  become  celebrated,  he  declared  that  to  do  away 
with  metallic  money  would  be  like  doing  away  with  roads; 
if  we  found  the  means  of  travelling  in  the  air,  we  could 
restore  to  cultivation  and  production  all  the  surface  of  the 
earth  that  is  now  devoted  to  transportation  by  land. 

Adam  Smith's  ingenious  comparison,  however,  leaves  some 
obscurity  in  our  minds.  We  can  see  readily  enough  that  when 
roads  and  railways  are  no  longer  required,  the  land  they  oc- 
cupy may  be  cleared  and  put  under  cultivation ;  but  it  is  not 
so  easy  to  see  what  can  be  done  with  metallic  money  when  it 
is  dispensed  with  for  currency  purposes.  Will  it  be  melted 
down  and  made  into  gold  and  silver  plate  or  jewelry  ?  That 
would  be  but  little  economic  gain.  What  would  really  result 
is  this :  the  money  would  be  invested  abroad,  and  thus  bring 
considerable  revenue.  The  United  States,  for  example,  now 
has  a  capital  in  the  form  of  gold  and  silver  coins  amounting 
to  over  $1,500,000,000.  Half  of  this  is  stored  in  the  govern- 

fabled  country  in  the  fourteenth  century.  Antiquity  has  left  us  several 
specimens  of  money  (if  not  of  paper,  at  any  rate  of  leather)  having  a  purely 
conventional  value ;  this  was  called  siege  money  because  it  had  been  issued 
usually  in  beleaguered  cities  to  take  the  place  of  metallic  money  which  was 
becoming  scarce. 


THE   ECONOMY    OF   PAPER    MONEY  267 

ment  treasuries  and  is  represented  in  circulation  by  the  cer- 
tificates to  which  we  have  already  referred.  This  enormous 
capital  undoubtedly  facilitates  trade ;  but  it  yields  no  profit. 
Suppose  now  that  we  find  a  means  of  substituting  paper  money 
for  these  coins ;  then  we  should  have  all  this  metallic  money  to 
invest  abroad,  either  by  purchasing  stock,  railway  shares,  land, 
and  ships,  or  by  improving  and  extending  foreign  industry 
and  agriculture.  These  investments  would,  in  one  way  or 
another,  produce  4  or  5  per  cent  interest,  and  thus  result  in 
an  increased  annual  revenue  of  $60,000,000  to  $75,000,000. 

Such  a  plan  as  this  may  be  compared  to  that  of  a  house- 
holder who,  in  possession  of  several  thousand  dollars'  worth 
of  silverware,  decides  that  porcelain  would  serve  him  quite 
as  well,  and  therefore  sells  his  silver  in  order  to  increase  his 
income  by  employing  the  proceeds  productively.  The  same 
line  of  conduct  is  pursued  by  those  industrious  persons  who, 
realizing  that  money  does  not  yield  any  profit  while  lying 
idle  in  their  pockets  or  in  their  safes,  keep  no  more  of  it  in 
their  houses  than  is  absolutely  necessary,  and  invest  all  the 
rest.  The  wealthiest  persons  are  often  those  who  have 
the  least  money  at  home.  While  the  thrifty  peasant  has 
a  drawer  full  of  gold  and  silver  coins,  the  millionnaire  has 
simply  a  check-book  with  which  to  pay  for  his  purchases. 

The  same  thing  is  true  of  nations.  While  France  employs 
$1,600,000,000  in  metallic  money,  England,  more  accustomed 
to  the  use  of  credit  devices  than  France,  employs  about 
$600,000,000  in  coin.  Yet  England  cannot  be  said  to  be 
poorer  than  France. 

When,  therefore,  the  question  is  asked,  "  Does  it  lie  within 
the  power  of  a  government  or  a  bank  to  increase  the  wealth 
of  a  country  by  issuing  paper  money  ?  "  it  is  not  perfectly 
correct  to  answer  with  an  unqualified  negative.  As  a  matter 
of  fact,  the  thing  is  feasible.  Paper  money  may  increase  the 
wealth  of  a  nation  ly  the  total  amount  of  metallic  money  in 
circulation.  The  replacing  of  $1,500,000,000  of  United 
States  coin  by  an  equal  amount  of  paper  money  would 


268  PRINCIPLES   OF   POLITICAL   ECONOMY 

actually  increase  our  wealth  by  that  amount ;  but  it  would 
not  be  increased  a  cent  more.  The  limit  here  indicated, 
moreover,  is  a  theoretical  one ;  in  practice  it  would  be  daring 
to  go  quite  so  far  as  this. 

But  it  must  be  observed  that  the  gain  could  not  be  made 
by  all  countries  at  the  same  time.  One  country  could  utilize 
its  supply  of  metal  productively  by  selling  it  abroad.  But 
if  every  country  wished  to  do  this,  it  is  evident  that  none 
would  succeed ;  gold  and  silver  specie,  offered  by  all  coun- 
tries seeking  to  get  rid  of  it,  and  demanded  by  none,  would 
be  a  drug  on  the  market  and  would  lose  their  value.1 

Nevertheless,  even  accepting  this  very  improbable  hypoth- 
esis as  true,  there  would  still  be  some  advantage  to  man- 
kind in  abandoning  the  use  of  precious  metals  as  money. 
For  there  would  henceforth  be  a  saving  of  all  the  labor  that 
is  devoted  to  the  maintenance  of  the  supply  of  metals,  —  the 
labor  of  mining,  of  turning  the  bullion  into  coin,  of  filling  up 
the  voids  caused  each  year  by  abrasion  and  accidental  losses, 
and  of  keeping  up  the  supply  at  a  level  that  is  required  by 
an  ever  increasing  population.  This  labor  is  no  small  item. 
The  extraction  of  ore  from  the  mines,  smelting,  transporta- 
tion, coinage,  etc.,  are  operations  that  demand  the  labor  of 
many  thousand  workers.  Do  away  with  metallic  money,  and 
all  these  laborers  will  be  available  for  production  along  other 
lines,  and  the  total  productive  power  of  humanity  will  really 
be  increased  to  this  extent. 

In  short,  then,  we  see  that  the  answer  to  the  question  at 
the  head  of  this  section  is  quite  different  from  that  formerly 
given.  We  must  no  longer  say  that  paper  money  in- 
creases the  wealth  of  a  nation  to  the  extent  that  it  increases  its 
supply  of  money,  but,  on  the  contrary,  to  the  extent  that  it 
permits  of  reducing  its  supply  of  metallic  money. 

1  It  is  in  this  respect  that  Adam  Smith's  comparison  is  faulty.  For  if  we 
discovered  a  means  to  dispense  with  roads,  the  result  would  be  different  : 
all  countries  could  simultaneously  benefit  from  the  use  of  land  that  had  pre- 
viously been  devoted  to  transportation  but  which  then  could  be  used  produc- 
tively. 


DANGERS   OF   PAPER   MONEY  269 

Such  is  the  economic  advantage  that  a  nation  may  obtain 
by  the  emission  of  paper  money.  If  now  we  ask  what  is  the. 
fiscal  advantage  resulting  from  its  emission  by  a  government, 
the  matter  is  more  simple.  When  a  government  falls  short 
of  money,  the  creation  of  paper  money  is  a  very  convenient 
way  to  pay  its  contractors,  its  employees,  and  its  expenses, 
without  being  obliged  to  borrow,  and  consequently  without  being 
required  to  pay  interest.  When  a  government  is  in  this  pre- 
dicament, its  credit  is  probably  not  of  the  best,  and  if  it  were 
obliged  to  borrow  at  interest  the  rate  would  be  very  high. 
Therefore  paper  money  effects  a  saving  that  is  not  to  be 
despised.1  Many  governments  have  resorted  to  this  expe- 
dient, and  have  in  general  succeeded  well  enough,  provided 
of  course  that  in  their  issues  they  did  not  exceed  the  limit 
we  have  laid  down,  fixed  by  the  amount  of  coin  in  circulation. 
Every  issue  which  goes  beyond  this  limit  must  cause  a  depre- 
ciation of  the  paper  and  a  loss  to  the  government  and  the 
nation  compared  with  which  the  economy  due  to  the  use  of 
paper  money  is  a  mere  bagatelle. 

III.  The  Dangers  resulting  from  the  Use  of  Paper  Money, 
and  the  Way  to  Prevent  Them 

The  advantages  that  paper  money  can  procure  for  a  coun- 
try or  for  a  government  are  real  enough,  but  they  may  be 

1  During  the  Franco-Prussian  War  the  French  government  had  need  of 
money,  and  issued  notes  to  the  value  of  $300,000,000.  If  it  had  borrowed 
this  sum,  it  would  have  been  obliged  to  pay  about  6  per  cent  interest,  or 
$18,000,000  a  year,  whereas  the  issue  of  paper  money  involved  no  expense 
but  the  cost  of  manufacture.  But  instead  of  issuing  the  paper  directly,  the 
French  government  chose,  for  valid  reasons,  to  use  the  intermediary  services 
of  the  Bank  of  France,  for  which  it  paid  1  per  cent  commission,  amounting 
to  only  ."$3,000,000  a  year.  For  the  nation,  this  issue  of  paper  money  was 
very  acceptable,  because  (on  account  of  exportation  and  hiding)  there  was 
insufficient  money  in  circulation.  Thus  the  issue  of  these  notes  was  a  benefit 
both  for  the  government  and  the  public.  But  the  amount  issued  was  not 
enough,  for  when  several  private  banks  formed  an  association  to  issue  frac- 
tional notes  of  a  value  less  than  five  francs,  the  public  was  glad  to  accept 
them. 


270  PRINCIPLES    OF   POLITICAL   ECONOMY 

dearly  paid  for ;  indeed,  they  may  cost  more  than  they  are 
worth.  Some  economists  have  gone  so  far  as  to  say  that 
paper  money  is  the  greatest  plague  of  nations,  and  that  it  is 
more  injurious  to  society  than  a  terrible  disease  is  to  an  individ- 
ual.1 It  must  be  noted,  however,  that  the  evil  effects  are  due 
rather  to  the  imprudence  of  governments  than  to  the  nature 
of  paper  money  itself.2  Indeed,  they  are  produced  only  when 
a  government,  overstepping  the  proper  limit,  issues  more  than 
is  needed.  The  need  may  be  measured  fairly  well  by  the 
amount  of  metallic  money  generally  in  circulation.  Never- 
theless, impecunious  governments  are  sorely  tempted  to  go 
beyond  this  fatal  limit ;  many  have  done  so,  and  have  ended 
in  bankruptcy.3 

It  may  safely  be  asserted  that  in  the  present  state  of 
economic  science  there  is  no  excuse  for  a  government  over- 
stepping the  limit.  There  are  several  signs,  familiar  to  the 
economist  and  the  financier,  which  should  warn  us  of  the 

1  While  the  paper-money  experiment  was  going  on  during  the  revolution- 
ary period  of  American  history,  Mr.  Pelatiah  Webster  declared  that  "We 
have  suffered  more  from  this  than  from  every  other  cause  of  calamity ;  it 
has  killed  more  men,  pervaded  and  corrupted  the  choicest  interests  of  our 
country  more,  and  done  more  injustice,  than  even  the  arms  and  artifices  of 
our  enemies." 

2  Experience  has  taught  that  when  paper  money  is  issued  through  the  in- 
termediary of  banks,  and  not  directly  by  the  government,  it  is  usually  done 
far  more  carefully  and  involves  less  danger.      This  is  due  to  the  fact  that 
bankers  are  more  vigilant  in  defending  their  own  interests  and  those  of  their 
stock-holders,  than  the  Government  Treasury  is  in  defending  the  interests  of 
the  public.     Hence  most  governments  have  issued  money  through  the  banks. 
(See  the  section  on  Differences  between  Bank-notes  and  Paper  Money.) 

8  Every  student  of  history  knows  the  lamentable  story  of  the  French 
assignats  issued  by  the  Convention  and  the  Directory  to  the  enormous 
amount  of  45,000,000,000  francs,  which  was  probably  twenty  times  the 
amount  of  coined  money  then  in  France.  Even  had  these  issues  consisted 
of  good  gold  and  silver  pieces,  they  would  nevertheless  have  caused  a  great 
depreciation  of  metallic  money,  since  the  amount  in  circulation  would  have 
been  twenty  times  what  was  required.  We  can  imagine,  then,  what  must 
have  been  the  depreciation  of  this  paper  money  !  In  February,  1796,  the 
hundred-franc  ($20)  assignat  fell  in  value  as  low  as  seven  cents,  and  a 
pair  of  boots  sold  for  4000  francs  ($800). 


SIGNS   OF    DEPRECIATION  271 

danger,  even  when  it  is  far  off,  and  which  are  surer  indica- 
tions than  the  pilot  obtains  from  sounding-lead  and  land- 
marks. 

(1)  The  first  of  these  signs  is  the  premium  for  gold.     As 
soon  as  paper  money  has  been  issued  in  quantities  too  great 
for  the  needs  of  a  community,  it  begins  (by  virtue  of  the  uni- 
versal law  of  value)  to  be  depreciated ;  the  first  effect  of  this 
depreciation,  the  first  sign  that  indicates  what  is  coming,  — 
although  the  general  public  may  not  be  aware  of  it,  —  is  that 
metallic  money  begins   to  command  a  premium.     Metallic 
money  is  not  affected  by  this  incipient  depreciation  of  the 
monetary  system.     Why  should  it  be  ?     Gold  and  silver  re- 
tain their  former  value.     Bankers  and  money-changers  begin 
to  seek  bullion  to  send  abroad,  and  they  will  pay  a  small  pre- 
mium to  obtain  it.     This  is  the  time  for  a  nation's  financiers 
to  keep  their  eyes  open ! 

(2)  The  second  sign  is  a  rise  in  the  rate  of  exchange.     Bills 
payable  abroad,  i.e.  foreign  bills  of  exchange,  are  sold  in  all 
the  great  commercial  centres  of  the  world.     Like  any  other 
commodity,  they  have  a  market  price  that  is  quoted  at  the 
stock-exchange ;  this  is  called  the  rate  of  exchange.     These 
bills,  or  claims  on  foreign  countries,  are  always  payable  in 
gold  or  silver,  —  generally  in  gold,  because  gold  is  the  inter- 
national money.     If,  for  example,  the  United  States  is  under 
a  paper-money  system  and  its  paper  begins  to  be  depreciated, 
bills  on  London  or  on  Paris  will  rise  in  price  just  like  gold 
itself,  since  they  are  in  fact  equivalent  to  gold.    When,  there- 
fore, our  ten-dollar  gold  piece  commands  a  premium  of  2  per 
cent  and  is  sold  for  $10.20,  a  hundred-dollar  bill  of  exchange 
on  London  will  rise  to  an  equal  premium  and  will  sell  for 
1102.     (See  the  section  on  the  Rate  of  Exchange.) 

(3)  The  third  sign  is  the  flight  of  metallic  money.     How- 
ever slight  the  depreciation  of  paper  money  may  be  (and  un- 
less this  defect  is  immediately  remedied  by  the  withdrawal  of 
the  excessive  paper),  all  the  metallic  money  will  speedily  dis- 
appear from  a  country.     This  phenomenon  is  invariable  and 


272  PRINCIPLES    OF   POLITICAL   ECONOMY 

therefore  characteristic ;  it  occurs  in  all  countries  where 
paper  money  has  been  issued  in  excess.  This  is  what  hap- 
pened in  Russia,  and  in  all  the  states  of  South  America, 
which  are,  nevertheless,  gold  and  silver  mining  countries. 
The  reasons  for  this,  which  we  explained  when  dealing  with 
Gresham's  law,  need  not  be  repeated  here. 

(4)  The  fourth  sign  is  a  rise  in  prices.      This  appears 
later  on,  and  shows  that  the  evil  has  already  become  a  grave 
one,  and  that  the  permissible  limit  has  been  greatly  exceeded. 
While  the  depreciation  of  paper  money  is  still  slight,  say 
2  or  3  per  cent,  prices  (except  those  of  the  precious  metals) 
are  not  affected.     Retail  dealers,  and  even  wholesale  deal- 
ers, will  not  alter  prices  for  so  trifling  a  difference  as  this; 
and  even  if  they  do  so,  the  public  will  not  worry  about  it. 
But  whenever  the  depreciation  of  paper  money  reaches  10, 
15,  or  20  per  cent,  then  all  tradesmen  and  all  producers  raise 
their  prices  correspondingly.1     The  evil,  which  until  then 
had  been  latent,  suddenly  bursts  forth  and  is  revealed  to  all. 

(5)  Finally,  we  must  note  that  the  old  prices  continue  the 
same  for  those  persons  who  can  pay  in  metallic  money,  if 

1  Business  men  and  producers  are  not  opposed  to  this  rise  in  prices ;  they 
become  accustomed  to  it  so  readily  that  they  approve  of  the  paper-money 
system  and  oppose  its  abolition,  because  that  would  result  in  a  return  to  the 
old  prices.  When  the  United  States  was  under  a  paper-money  system,  there 
was  an  important  political  party,  significantly  called  inflationists,  which  did 
everything  in  its  power  to  maintain  that  system.  At  the  present  time  there 
is  a  similar  party  in  the  Argentine  Republic.  (For  the  explanation  of  these 
facts,  see  page  229.) 

As  paper  money,  especially  that  which  is  for  any  reason  inconvertible, 
rises  or  falls  in  value  almost  constantly,  prices  will  be  constantly  changing. 
If  a  manufacturer  or  merchant  does  not  know  what  the  price  of  his  goods  will 
be  a  week  ahead,  he  is  cut  off  from  any  legitimate  estimate  of  his  coming 
receipts  or  expenses,  and  is  obliged  to  guess  at  the  course  of  the  market. 
Speculators  who  think  that  the  rise  in  prices  will  continue,  purchase  large 
stocks  of  goods  in  order  to  sell  out  when  the  rise  comes.  This  may  create 
an  excessive  demand,  tending  to  advance  prices  still  further.  Although  all 
prices  have  risen,  there  are  many  people  who  believe  that  when  prices  rise 
they  are  richer  than  before;  they  are  worth  more  in  "dollars,"  but  they 
overlook  the  fact  that  dollars  will  now  buy  much  less  than  before.  (See 
J.  L.  LAUGHLIN,  "Elements  of  Political  Economy,"  page  167.) 


AMERICAN   PAPER    MONEY  273 

there  is  any  of  it  left.  For  metallic  money  has  lost  none 
of  its  former  value ;  on  the  contrary,  compared  with  paper 
money  it  has  gained.  Hence  we  observe  the  curious  phe- 
nomenon of  two  different  sets  of  prices  for  commodities. 
Every  article  now  has  two  prices,  one  payable  in  metallic 
money,  the  other  in  paper  money.  The  difference  between 
the  two  prices  exactly  measures  the  depreciation  of  the 
paper  money.  Thus,  for  example,  in  Russia  an  article 
that  sold  for  eight  roubles  in  paper  would  bring  only  five  or 
six  roubles  in  silver,  because  of  the  depreciation  of  Russian 
paper  money. 

As  soon,  therefore,  as  a  government  perceives  the  premoni- 
tory signs,  namely,  a  premium  for  gold  and  a  rise  in  the  rate 
of  exchange,1  its  first  duty  is  absolutely  to  forbid  the  emis- 
sion of  any  more  paper  money,  since  the  extreme  limit  has 
already  been  reached.  If  this  limit  has  unfortunately  been 
overstepped,  and  we  discover  the  ominous  symptom  of  double 
prices,  it  must  endeavor  to  retrace  its  steps  and  destroy  the 
paper  money  that  returns  to  the  public  treasury,  until  there 
is  the  right  amount  in  circulation.  Such  an  heroic  remedy 
as  this,  however,  involving  the  partial  suppression  of  the 
national  revenue,  is  not  within  the  power  of  all  governments. 
They  cannot  resort  to  it  unless  they  can  afford  to  sacrifice 
a  part  of  their  revenue  ;  in  other  words,  the  public  revenue 
must  be  in  excess  of  public  expenditures. 

IV.   American  Paper  Money 

The  experience  of  our  own  country  with  paper  money  of 
all  kinds  has  been  sufficient  to  serve  very  appropriately  as  an 
illustration  of  the  principles  underlying  this  department  of 
economic  science. 

1  When  at  the  close  of  the  war  of  1870  France  was  under  the  paper- 
money  system,  and  all  its  gold  went  into  Germany  to  pay  the  war  indemnity, 
gold  immediately  rose  to  a  premium  of  2£  per  cent  (fifty,  centimes  on  a 
twenty-franc  piece).  That  was  not  a  great  rise,  but  it  was  enough  to  put  the 
government  on  its  guard,  and  the  danger  was  averted. 


274  PBINCIPLES    OF    POLITICAL   ECONOMY 

The  first  government  paper  to  circulate  as  money  in  this 
country  appears  to  have  been  the  "  bills  of  credit "  issued  by 
the  colony  of  Massachusetts  in  1690  to  the  amount  of  £40,- 
000,  in  order  to  pay  the  colonial  troops  for  a  disastrous  mili- 
tary expedition  against  Canada.  As  the  public  treasury  was 
empty  and  the  soldiers  refused  to  wait,  these  bills  were  issued 
in  anticipation  of  the  tax  collections ;  they  were  not  payable 
at  any  particular  time,  they  did  not  bear  interest,  and  were 
not  legal  tender.  As  they  did  not  pass  for  more  than  twelve 
or  fourteen  shillings  in  the  pound,  the  soldiers  lost  two-fifths 
of  their  dues.  In  1692  the  bills  were  made  legal  tender  in 
all  payments,  receivable  for  taxes  .at  5  per  cent  better  than 
silver,  and  redeemable  in  silver  at  the  end  of  twelve  months. 
These  provisions  made  them  as  good  as  silver. 

The  idea  of  issuing  paper  money,  once  introduced,  spread 
to  all  the  other  colonies  like  an  epidemic.  In  many  instances 
the  opposition  of  the  royal  governors  to  the  introduction  of 
"bills  of  credit"  contributed  to  the  irritation  against  the 
mother  country  which  culminated  in  the  Revolutionary  War. 
Down  to  the  founding  of  the  union,  the  paper-money  party 
in  each  of  the  colonies,  largely  made  up  of  debtors  and  spec- 
ulators, endeavored  to  secure  an  abundance  of  cheap  money. 
The  lower  houses  of  the  colonial  legislatures  were  controlled 
by  a  body  of  insolvent  debtors.1  One  of  the  commonest 
ways  of  increasing  the  issues  of  paper  was  the  alleged  re- 
placement of  old  and  worn  bills,  which  often  meant  an  issue 
so  large  as  to  leave  a  margin  for  general  expenses,  and  some- 
times a  very  large  margin.  Reports  which  were  made  from 

1  Their  methods  are  thus  characterized  by  Thomas  Paine,  writing  in  1786 : 
"There  are  a  set  of  men  who  go  about  making  purchases  upon  credit  and 
buying  estates  that  they  have  not  wherewithal  to  pay  for  ;  and  having  done 
this  their  next  step  is  to  fill  the  newspapers  with  paragraphs  of  the  scarcity 
of  money  and  the  necessity  of  a  paper  emission,  then  to  have  legal  tender 
under  the  pretence  of  supporting  its  credit,  and  when  out,  to  depreciate  it  as 
fast  as  they  can,  get  a  deal  of  it  for  a  little  price  and  cheat  their  creditors  ; 
and  this  is  the  concise  history  of  paper-money  schemes."  "  Writings,"  Vol. 
II,  p.  178. 


COLONIAL  PAPER  MONEY  275 

time  to  time  to  the  home  government  in  response  to  inquiries 
regarding  the  amount  of  bills  outstanding,  were  ingeniously 
prepared  so  as  to  convey  false  impressions,  whenever,  indeed, 
they  answered  these  inquiries  at  all.  Horace  White  has 
summed  up  the  usual  course  of  events  where  these  bills  of 
credit  were  issued,  as  follows  :  (1)  Emissions  ;  (2)  disap- 
pearance of  specie  ;  (3)  counterfeiting  ;  (4)  wearing  out  of 
bills  ;  (5)  calling  in  and  replacing  worn  and  counterfeited 
issues  with  new  ones  ;  (6)  extending  the  time  for  old  ones 
to  run,  especially  those  which  had  been  placed  on  loan  ;  (7) 
depreciation  ;  (8)  repudiation  of  early  issues  in  part  and  the 
emission  of  others,  called  "new  tenor." 

When  popular  governments  have  once  started  the  conven- 
ient process  of  issuing  paper  money,  there  seems  to  be  no 
hope  of  arresting  it.  Bad  as  the  colonial  bills  of  credit  were, 
those  of  the  revolutionary  period  were  worse.  The  Conti- 
nental Congress  had  need  of  money  but  no  means  of  raising 
it.  Therefore  it  had  recourse  to  the  expedient  of  issuing 
paper  money,  to  be  redeemed  by  the  states,  —  which  never 
did  redeem  it.  Pelatiah  Webster  was  almost  the  only  man 
of  prominence  to  insist  upon  taxation  as  the  only  legitimate 
means  of  raising  money  for  the  war.  But  the  popular 
sentiment  was  entirely  opposed  to  this,  and  one  delegate  to 
the  Congress  voiced  the  general  feeling  when  he  asked  with 
unspeakable  scorn  why  he  should  vote  to  tax  the  people, 
when  a  Philadelphia  printing  press  could  turn  out  money  by 
the  bushel.  In  the  summer  of  1775  "  due  bills  "  for  13,000,000 
were  issued,  which,  at  the  suggestion  of  Congress,  were 
declared  by  the  colonies  to  be  legal  tender.  From  this  time 
forward,  the  issues  of  "  continental "  paper  currency  —  so 
called  to  distinguish  it  from  the  money  issued  by  the  separate 
colonies  —  followed  in  rapid  succession,  until  1241,000,000 
had  been  issued  by  1779.  To  prevent  depreciation  it  was 
deemed  necessary  to  fix  the  prices  of  merchandise  by  law 
and  to  prohibit  selling  merchandise  at  higher  prices  for  paper 
than  for  silver.  Severe  punishments  were  inflicted  for  this 


276  PRINCIPLES    OF    POLITICAL   ECONOMY 

offence,  but  by  1777  the  depreciation  was  too  great  to  be 
ignored,  and  a  little  later  the  Continental  paper  became  so 
valueless  as  to  give  rise  to  the  characteristic  expression  "  not 
worth  a  continental."  l 

In  May,  1781,  Congress  recommended  that  the  states 
should  repeal  their  legal-tender  laws.  All  of  them  subse- 
quently adopted  "  scales  of  depreciation  "  for  the  settlement 
of  debts.  These  were  tables  showing  how  much  the  money 
was  worth  in  specie  at  various  times,  and  how  disputed 
accounts  should  be  settled.  The  tables  were  notoriously 
incorrect.  The  one  recommended  by  Congress  placed  the 
currency  at  par  in  September,  1777,  whereas  it  was  worth  at 
that  time  only  33  cents  on  the  dollar.  August  4,  1790, 
Congress  granted  authority  for  funding  the  bills  in  6  per 
cent  bonds  "  at  the  rate  of  one  hundred  dollars  in  the  said 
bills  for  one  dollar  in  specie."  Only  $7,000,000  turned  up  to 
take  advantage  of  this  provision. 

After  the  establishment  of  the  union  a  number  of  states 
plunged  afresh  into  debauchery  of  paper  money.2  Despite 
the  common  sense  displayed  by  a  few  men,  such  as  Thomas 
Paine,  who  emphatically  asserted  that  "  money  is  money  and 
paper  is  paper,"  the  advocates  of  paper  money  triumphed  in 
many  of  the  states  and  succeeded  in  passing  laws  imposing 
severe  penalties  on  persons  that  refused  to  accept  the  paper. 
Meanwhile  the  paper  declined  steadily  in  value,  and  landowners 
who  had  covered  their  farms  with  mortgages  made  haste  to  lift 

1  "  Washington  said  it  took  a  wagon-load  of  money  to  buy  a  wagon-load  of 
provisions.     At  the  end  of  the  year  1778  the  paper  dollar  was  worth  sixteen 
cents  in  the  northern  states  and  twelve  cents  in  the  south.     Early  in  1780  its 
value  had  fallen  to  two  cents,  and  before  the  end  of  the  year  it  took  ten 
paper  dollars  to  make  one  cent.     In  October,  Indian  corn  sold  wholesale  in 
Boston  for  $150  a  bushel,  butter  was  $12  a  pound,  tea  $90,  sugar  $10,  beef 
$8,  coffee  $12,  and  a  barrel  of  flour  cost  $1575.     Samuel  Adams  paid  §2000 
for  a  hat  and  a  suit  of  clothes."  —  FISKE,  "The  American  Revolution,  "Vol.  II. 
In  Philadelphia  a  barber  papered  his  shop  with  bills,  and  a  dog  was  led  up 
and  down  the  streets  covered  with  a  coat  of  continental  paper  money. 

2  McMaster,   in   Vol.    I  of   his   "History  of  the  People  of  the  United 
States,"  describes  the  paper-money  agitation  in  the  states  at  this  time. 


GREENBACKS  277 

them  by  paying  the  depreciated  but  lawful  money.  As  the 
sums  were  sometimes  large  and  the  money  bulky,  it  was  fre- 
quently carried  in  handkerchiefs,  and  occasionally  in  pillow- 
cases. 

For  a  time  the  financial  problems  facing  the  national  gov- 
ernment apparently  did  not  call  for  renewed  experiments 
with  paper  money,  and  at  the  beginning  of  the  Civil  War,  in 
1861,  the  currency  of  the  United  States  consisted  of  gold  coins, 
subsidiary  silver,  minor  coin,  and  state  bank-notes.  •  In  1862, 
after  unwise  action  by  the  Treasury  Department  had  forced 
the  banks  of  the  country  to  suspend  specie  payments,  i.e.  to 
refuse  to  meet  their  obligations  in  coin,  Congress  passed  a 
law  authorizing  the  issue  of  $150,000,000  of  United  States 
notes,  not  bearing  interest,  payable  to  bearer,  of  denomina- 
tions not  less  than  $5  each.  They  were  to  be  legal  tender 
in.  payment  of  all  debts,  public  and  private,  except  duties 
on  imports  and  interest  on  the  government  debt.  A  few 
months  later  another  act  authorized  the  issue  of  $150,000,000 
more  of  these  notes,  so  crying  were  the  needs  of  the  Treas- 
ury for  funds  to  carry  on  the  war.  The  total  amount  finally 
reached  $450,000,000. 

But  these  notes  or  "greenbacks,"  as  they  were  called, 
immediately  depreciated.  In  1864  each  note  was  worth  only 
49  per  cent  of  its  face  value,  and  ultimately  fell  to  35  cents 
per  dollar.  As  the  government  was  obliged  to  pay  higher 
prices  for  everything,  the  cost  of  the  Civil  War  was  nearly 
$1,000,000,000  more  than  it  would  have  been  otherwise. 
The  notes  were  originally  made  convertible,  at  the  option  of 
the  holder,  into  bonds  bearing  interest  in  coin  at  6  per  cent. 
But  this  connecting  link  between  the  notes  and  gold  was 
unwisely  repealed  in  1863.  If  it  had  remained  in  force,  the 
notes  would  have  been  exchanged  for  bonds  whenever  the 
price  of  the  latter  was  above  par,  and  specie  payments  would 
probably  have  been  resumed  soon  after  the  close  of  the  war. 
As  a  matter  of  fact  these  notes  were  not  really  redeemable 
in  coin  until  1879. 


278  PRINCIPLES    OF   POLITICAL   ECONOMY 

Two  other  kinds  of  legal-tender  notes  were  issued  during 
the  war.  They  were  called  "  Treasury  notes  "  in  contradis- 
tinction to  the  United  States  notes  or  "greenbacks."  On 
March  3, 1863,  Congress  authorized  the  issue  of  8400,000,000 
of  Treasury  notes  of  denominations  not  -less  than  $10,  to  run 
not  more  than  three  years,  to  bear  interest  not  exceeding  6  per 
cent  payable  in  "  lawful  money,"  i.e.  in  either  gold  or  United 
States  notes.  They  were  to  be  legal  tender  for  their  face 
value,  excluding  interest.  The  object  of  this  law  was  to 
obtain  loans  from  small  investors  without  increasing  the  cur- 
rency. Anybody  having  $10  for  which  he  had  no  immedi- 
ate use  could  buy  a  Treasury  note  for  that  sum.  He  would 
be  impelled  to  hoard  it  for  the  sake  of  the  interest,  but  if 
necessary  he  could  use  it  as  money  for  its  face  value, 
in  which  case  the  recipient  would  be  impelled  to  hoard 
it.  Under  this  act  $44,520,000  of  one-year  notes,  and 
$166,480,000  of  two-year  notes,  bearing  interest  at  5  per 
cent,  were  issued.  A  portion  of  these  notes  had  inter- 
est coupons  attached  to  them,  which  could  be  cut  off 
and  collected  as  the  interest  matured.  These  were  found 
to  be  troublesome,  since  they  caused  alternate  contraction 
and  expansion  of  the  currency.  When  the  accumulated 
interest  was  sufficient  to  make  it  worth  while  for  the  owner 
to  keep  them  they  would  be  hoarded,  and  when  the  coupon 
was  cut  off  they  would  be  put  in  circulation.  They  were 
paid  off  by  the  government  and  cancelled  as  soon  as  possible. 

Under  this  act  also  there  were  issued  $266,595,440  of 
compound-interest  notes  to  run  three  years.  The  rate  of 
interest  was  six  per  cent,  compounded  semi-annually,  and 
the  interest  was  payable  with  the  principal  at  maturity  and 
not  otherwise.  On  the  back  of  the  note  was  printed  a  state- 
ment showing  its  value  at  the  end  of  each  six  months.  This 
was  the  most  scientific  form  of  legal-tender  notes  issued  dur- 
ing the  war,  since  it  offered  a  continuing  inducement  to  the 
owner  to  hold  them  as  an  investment  instead  of  putting 
them  in  circulation. 


POSTAGE   CURRENCY  279 

In  the  summer  of  1862,  when  the  silver  subsidiary  coins 
grew  scarce  because  of  the  depreciated  greenbacks,  people 
began  to  use  postage  stamps  as  a  substitute.  The  demand 
for  stamps  became  greater  than  the  Post  Office  Department 
could  supply;  the  stamps,  moreover,  were  inconvenient  to 
use.  Accordingly,  Congress  issued  small  notes  to  take  the 
place  of  the  stamps,  consisting  of  strips  of  paper  bearing  the 
facsimile  of  postage  stamps.  This  was  called  "  postage  cur- 
rency." By  a  later  act,  fractional  currency  was  issued  in 
the  form  of  promissory  notes  of  the  United  States  for  sums 
less  than  one  dollar.  These  notes  were  small  and  easily 
worn  out  and  lost ;  the  largest  amount  in  circulation  at  any 
time  was  127,000,000. 

Of  particular  interest  to  the  economist,  however,  is  the 
endeavor,  made  in  1864,  to  keep  down  the  price  of  gold  (for 
which  the  greenbacks  had  steadily  been  increasing  the  pre- 
mium) by  legislative  enactment.  Secretary  Chase  induced 
Congress  to  pass  a  bill  "  to  prohibit  certain  sales  of  gold  and 
foreign  exchange."  The  law,  based  on  the  belief  that 
brokers  had  caused  the  price  of  gold  to  advance,  imposed 
heavy  fines  and  penalties  upon  all  those  who  should  violate 
it.  But  the  measure  remained  on  the  statute  book  only  two 
weeks.  On  the  day  it  passed,  gold  was  quoted  at  198.  The 
next  day  it  was  208,  the  next  230,  and  in  a  few  more  days, 
250.  Whereupon  Congress  repealed  the  act  without  debate. 

Another  matter  of  essential  interest  and  importance  is  the 
effect  of  this  depreciated  legal-tender  paper  on  wages.  Pro- 
fessor Taussig  maintains  that  "  money  wages  responded  with 
unmistakable  slowness  to  the  inflating  influences  of  the  Civil 
War.  In  1865,  when  prices  stood  at  217  as  compared  with 
100  in  1860,  wages  had  only  touched  143.  The  course  of 
events  at  this  time  shows  the  truth  of  the  common  statement 
that  in  times  of  inflation,  wages  rise  less  quickly  than  prices, 
and  that  the  period  of  transition  is  one  of  hardship  to  the 
wage-receiving  class."  l 
1  Paper  read  before  the  International  Statistical  Institute  at  Chicago,  1893. 


280  PRINCIPLES    OF   POLITICAL    ECONOMY 

Congress  voted  in  December,  1865,  in  favor  of  the  early 
resumption  of  specie  payments.  In  pursuance  of  this  design, 
in  April,  1866,  it  passed  a  law  for  retiring  and  cancelling  the 
legal-tender  notes  at  the  rate  of  $4,000,000  a  month.  But  in 
February,  1868,  this  act  was  repealed,  after  1-14,000,000  had  been 
retired.  In  1873  the  Treasury  Department  reissued  $26,000,- 

000  of  the  retired  notes.     Later  Congress  voted  to  resume 
specie  payments  on  January  1,  1879.     Since  then  the  notes 
have  always  been  redeemed  in  gold  coin,  whenever  presented 
to  the  subtreasury  in  New  York.     Subsequently  it  was  pro- 
vided that  the  notes  should  not  be  retired  when  redeemed, 
but  should  be  paid  out  and  kept  in  circulation.     At  that 
time  the  amount  outstanding  was  $346,681,016,  and  it  has 
remained  at  that  figure  ever  since.     A  permanent  gold  fund 
for  the  redemption  of  these  notes  was  indirectly  established 
by  the  act  of  1882,  which  provided  that  "the  Secretary  of 
the  Treasury  shall   suspend   the   issue    of   gold  certificates 
whenever  the  amount  of  gold  coin  and  bullion  in  the  Treas- 
ury reserved  for  the  redemption  of  the  United  States  notes 
falls  below  $100,000,000."  l 

V.     How  even  Paper  Money  may  be  Dispensed  With 

Although  paper  money  economizes  metallic  money,  this 
advantage,  as  we  have  seen,  is  obtained  only  at  the  price  of 
serious  disadvantages  and  even  of  great  dangers.  If,  there- 
fore, it  were  possible  to  find  some  way  to  economize  metallic 
money  without  resorting  to  so  dangerous  an  expedient  as 

1  For  the  information  contained  in  this  brief  sketch  of  our  paper  money 

1  am  indebted  principally  to  Horace  White's  "  Money  and  Banking,"  second 
edition,  1902.     Other  literature  of  which  use  was  made,  and  to  which  the 
student  may  be  referred,  is  as  follows :  McMaster,  "  History  of  the  People 
of  the  United  States"  ;  Fiske,  "The  American  Revolution"  ;  A.  S.  Bolles, 
"Financial  History  of  the  United  States"  ;  Phillipps,  "  Historical  Sketch  of 
American  Paper  Currency  "  ;  Felt,  "  Historical  Account  of  Massachusetts 
Currency"  ;  A.  M.  Davis,  "Currency  and  Banking  in  the  Province  of  Mas- 
sachusetts Bay  "  ;  J.  H.  Cuntz,  "  Our  Money  as  It  Is  "  (Vol.  VII,  No.  6,  of 
"Sound  Currency").— C.  W.  A.  V. 


BILLS   OF   EXCHANGE  281 

paper  money,  this  would  undoubtedly  be  a  great  benefit. 
Now  there  is  such  a  way  as  this,  and  it  is  more  effective  as 
well  as  less  dangerous  than  paper  money.  It  consists  not  in 
replacing  a  costly  instrument  of  exchange  by  another  that 
costs  nothing  at  all,  but  simply  in  doing  away  with  every  in- 
strument of  exchange.  We  may  explain  the  operation  of 
such  a  scheme  in  the  following  way. 

In  the  first  place:  We  replace  cash  sales,  i.e.  the  exchange 
of  commodities  for  money,  by  sales  on  credit,  i.e.  the  ex- 
change of  commodities  for  a  promise  to  pay  at  some  future 
date.  Credit  sales  are  in  reality  nothing  more  than  this : 
I  give  you  my  commodity,  and  receive  in  exchange  for  it 
your  promise  to  pay,  represented  by  a  note  or  by  a  bill  of 
exchange.1 

In  the  second  place :  Once  these  promises  to  pay  have  been 
made,  we  seek  to  have  them  fulfilled  in  some  other  way 
than  by  actual  payment  in  metallic  money.  Jurisprudence 
suggests  various  methods  of  accomplishing  this ;  for  example, 
what  the  jurists  call  compensatio  (by  means  of  which  two 
exactly  opposite  and  equivalent  claims  or  obligations  coun- 
terbalance each  other),  or  confusio  (when  one  party  is  at 
the  same  time  both  creditor  and  debtor),  or  novatio  (when 
one  promise  to  pay  is  extinguished  by  making  a  new  promise). 

The  extreme  complexity  of  social  relations  and  the  fact 
that  each  of  us  —  or  at  any  rate  each  producer  —  is  in  turn 
both  buyer  and  seller  make  it  a  very  easy  matter  to  apply 
such  devices  as  these  to  facilitate  payments. 

It  was  first  of  all  in  international  commerce,  in  exchange 
between  countries,  that  men  learned  to  employ  credit  and  to 
dispense  with  the  direct  use  of  money.  The  difficulty  and 
danger  of  transporting  large  quantities  of  money  over  great 
distances  led  the  Lombards,  it  is  believed,  to  invent  the  bill 
of  exchange.  The  foreign  bill  of  exchange,  indeed,  is  the  first 
form  of  negotiable  paper  known  to  English  law.  When 

1  For  the  understanding  of  this  section  the  reader  should  refer  to  the 
chapter  on  Credit. 


282  PRINCIPLES    OF   POLITICAL   ECONOMY 

originally  used  in  the  thirteenth  century,  it  was  only  in 
dealings  between  merchants  of  different  countries;  but  in 
the  seventeenth  century  inland  bills  of  exchange  came  into 
use  between  merchants  in  different  parts  of  England. 

A  bill  of  exchange  or  draft  (of  which  frequent  mention 
will  be  made  hereafter)  is  a  written  order  by  which  the 
person  drawing  the  bill  orders  some  other  person,  upon 
whom  he  has  a  claim,  to  pay  a  specified  sum  of  money  to  a 
third  person.  These  bills  are  payable  either  at  sight  or  at 
some  specified  time.  It  is  not  necessary  that  the  person  to 
whom  they  are  given  shall  present  them  himself  for  payment. 
They  may  by  indorsement  be  transferred  from  one  person  to 
another.  In  this  manner  one  bill  may  serve  to  make  many 
payments  before  the  drawee  is  called  upon  to  make  final  pay- 
ment. The  utility  of  these  bills  is  most  manifest  in  foreign 
exchanges,  and  may  perhaps  best  be  made  clear  by  an 
example. 

Suppose  that  American  wheat  dealers  have  sold  to  England 
$2,000,000  worth  of  wheat  at  six  months'  credit;  that  is 
to  say,  instead  of  receiving  money  from  England  they  have 
drawn  bills  of  exchange  to  the  value  of  $2,000,000  upon  their 
English  debtors.  Now  suppose,  furthermore,  that  English 
manufacturers  of  cutlery  have  sold  $2,000,000  worth  of 
knives  and  forks  to  American  dealers  on  similar  terms  and 
have  drawn  an  equal  amount  in  bills  of  exchange  payable  in 
the  United  States.  When  the  American  purchasers  of  cut- 
lery wish  to  pay  for  the  goods  bought  from  England,  will 
they  send  $2,000,000  in  coin  across  the  sea?  Certainly  not. 
They  will  simply  purchase  from  the  American  wheat  dealers 
the  $2,000,000  worth  of  bills  of  exchange  payable  in  Eng- 
land ;  they  will  then  send  these  bills  to  their  English  cred- 
itors in  place  of  money,  saying,  "Collect  these  sums  from 
your  fellow-countrymen."  It  will  not  be  difficult  for  them  to 
procure  these  bills  of  exchange,  for,  as  we  shall  see,  there  are 
persons  called  bankers  who  make  it  a  business  to  buy  and 
sell  them,  i.e.  persons  who  buy  paper  payable  abroad,  in 


BILLS   OF   EXCHANGE  283 

order  to  sell  it  to  those  that  require  it.  The  use  of  such 
bills  avoids  the  manifest  absurdity  of  sending  two  shipments 
of  coin  across  the  ocean,  one  to  England  and  the  other  to 
America.1 

It  is  true  that  our  example  supposes  that  the  two  countries 
are  indebted  to  each  other  for  exactly  the  same  amount,  — 
a  supposition  that  is  very  unlikely  to  hold  true.  But  although 
it  is  not  directly  true,  the  same  result  may  nevertheless  be 
reached  in  a  roundabout  way.  Let  us  grant,  for  instance, 
that  the  United  States  has  purchased  $2,000,000  worth  of  tea 
from  China,  but  sold  nothing  in  return.  The  above  kind  of 
compensation  then  seems  impossible.  Shall  we  not  in  this  case 
be  obliged  to  send  §2,000,000  in  coin  to  China?  Perhaps  not. 
Although  we  may  have  sold  nothing  to  China,  there  are 
probably  other  countries  that  have  sold  goods  there,  and  that 
are  consequently  creditors  of  the  Chinese.  All  we  need  to 
do  is  to  buy  their  claims  on  China.  When  we  shall  thus 
have  become  creditors  of  the  Chinese,  nothing  will  be  easier 
than  to  balance  our  accounts  with  them.  It  is  possible,  for 
instance,  that  England  has  sold  China  $2,000,000  worth  of 
cotton  cloth.  In  this  event  we  should  only  have  to  buy 
England's  claim  upon  China  for  this  sum ;  or,  to  put  it  tech- 
nically, we  might  purchase,  at  London,  paper  payable  on 
Shanghai  or  Hong  Kong.  But  it  may  be  objected  that  in 
any  case  we  shall  be  obliged  to  pay  $2,000,000,  and  that  it 
matters  little  whether  we  pay  it  to  England  or  to  China. 
This,  however,  is  an  error.  It  matters  very  much  whether 
we  owe  to  China  or  to  England,  for  in  the  latter  case  it 
is  only  requisite  that  we  shall  ourselves  have  a  claim  of 
$2,000,000  against  England  (perhaps  for  wheat  we  have  sold 
her)  in  order  to  balance  accounts  for  all  three  nations,  per- 
haps without  the  payment  of  a  single  dollar  in  money. 

Without  such  ingenious  devices  as  this,  international  trade 

1  Brief  but  clear  explanations  of  the  legal  nature  and  significance  of  bills 
of  exchange  may  be  found  in  White's  "Business  Law"  and  Burdick's 
"  Essentials  of  Business  Law.'1 


284  PRINCIPLES    OF    POLITICAL    ECONOMY 

would  be  impossible.  If  the  United  States,  for  instance,  were 
obliged  each  year  to  pay  in  cash  for  the  1900,000,000  worth  of 
goods  which  we  import,  whence  could  we  obtain  this  enor- 
mous amount  of  money?  There  is  not  enough  metallic 
money  in  the  whole  country  to  enable  us  to  pay  in  cash  for 
our  imports  during  twenty  months.  In  reality,  the  amount 
of  money  that  is  sent  from  one  country  to  another  is  never 
more  than  a  small  fraction,  — 10  per  cent  at  the  most  —  of 
the  value  of  merchandise  exchanged. 

In  the  transaction  of  business  between  individuals  we  are 
by  no  means  so  far  advanced.  Yet  exchanges  between  indi- 
viduals could  be  effected  by  means  of  the  same  system  as  that 
used  between  nations,  namely,  selling  on  short  credits,  creat- 
ing bills  of  exchange,  and  passing  them  from  person  to  person 
until  they  are  counterbalanced  by  each  other.  Suppose,  for 
instance,  that  I  am  a  lawyer,  and  that  one  of  my  clients,  who 
is  a  wine-merchant,  owes  me  money.  Instead  of  paying  me, 
he  gives  me  his  note.  When  I  want  to  pay  my  book-dealer, 
I  can  give  him  this  note  in  payment.  If  it  should  happen 
that  my  book-dealer  gets  his  wine  from  the  same  wine-mer- 
chant, it  is  a  very  simple  matter  for  him  to  use  this  note  in 
payment.1 

1  Here  is  a  fuller  illustration  :  In  the  same  town  let  there  be  three  persons, 
whom  we  will  call  A,  B,  and  C.    Let  us  suppose  that  A  is  a  creditor  of  B's, 
B  a  creditor  to  the  same  amount  of  C's,  and  C  in  his 
turn  a  creditor  of  A's.    This  is  shown  by  the  accom- 
•panying  diagram. 

Is  it  not  clear  that,  instead  of  having  the  sum  of 
money  owed  by  the  three  debtors  respectively  to  their 
three  creditors  pass  through  a  complete  circuit,  it 
would  be  far  simpler  to  settle  the  whole  transaction 
without  paying  a  cent  in  cash  ?  We  may  be  told  that 
it  is  highly  improbable  that  C  should  be  a  creditor 
of  A's,  and  should,  as  it  were,  be  purposely  placed  where  he  is,  in  order 
to  close  the  circle.  No  doubt  it  is  improbable.  But  if  C  is  not  a  creditor 
of  A's,  he  will  stand  in  that  relation  to  D,  E,  F,  G,  or  H,  etc.,  until  we 
finally  come  to  a  man  who  in  his  turn  is  a  creditor  of  A's,  and  then  the 
problem  is  solved.  The  more  persons  there  are  in  the  operation,  the  better 
chance  there  will  be  of  closing  the  circle. 


THE   SYSTEM   OF   BOOK   CREDITS  285 

But  we  can  conceive  another  method,  infinitely  more  sim- 
ple in  theory  and  easier  to  understand.  Suppose  that  all  our 
citizens  have  opened  an  account  at  the  same  bank,  and  that 
it  is  the  business  of  the  bank  to  register  everybody's  sales  by 
giving  him  credit  for  the  respective  amounts,  and  everybody's 
purchases  by  marking  them  to  his  debit.  Accounts  then 
might  be  balanced  by  means  of  book  credits  and  book  debits. 
Such  a  system  as  this  would  dispense  entirely  with  money. 
Every  time  I  made  a  purchase,  instead  of  paying  the  store- 
keeper I  should  authorize  the  bank  to  place  the  necessary 
sum  to  my  debit  and  to  the  storekeeper's  credit.  The  latter, 
in  turn,  would  do  likewise  whenever  he  had  occasion  to  make 
any  purchases. 

If,  instead  of  buying  goods,  I  want  to  make  an  invest- 
ment, the  process  would  be  just  the  same:  the  bank  would 
enter  to  my  debit  the  sum  representing  the  value  of  the 
stock,  and  an  equal  value  to  the  credit  of  the  company  which 
issued  it,  or  the  former  holder  who  transferred  it  to  me. 
At  the  end  of  the  year  the  bank  would  send  a  statement 
to  each  person,  indicating  his  account  for  the  year,  and  dis- 
closing a  balance  in  favor  either  of  the  banker  or  the  client. 
If  the  latter  is  the  case,  the  surplus  is  credited  to  the 
client ;  if  the  former,  it  is  debited.  It  is  evident  that,  theo- 
retically, under  such  a  system  as  this  all  business  transac- 
tions could  be  settled  by  means  of  book  credits.1 

1  The  term  book  credit  is  usually  applied  not  to  the  accounts  kept  by  bank- 
ing establishments,  but  to  accounts  kept  by  dealers  themselves.  Our  use  of 
the  term  is  an  extension  of  its  application.  "If  two  firms  have  frequent 
transactions  with  each  other,  alternately  buying  and  selling,  it  would  be  an 
absurd  waste  of  money  to  settle  each  debt  immediately  it  arose,  when,  in  a 
few  days,  a  corresponding  debt  might  arise  in  the  opposite  direction.  Accord- 
ingly, it  is  the  common  practice  for  firms  having  reciprocal  transactions  to 
debit  and  credit  each  other  in  their  books,  with  the  debt  arising  out  of  each 
transaction,  and  only  to  make  a  cash  payment  when  the  balance  happens  to 
become  inconveniently  great."  (Jevons,  "Money,"  page  251.)  The  term 
book  credit  is  generally  confined  to  this  sort  of  operation. 


286  PRINCIPLES   OF   POLITICAL   ECONOMY 


VI.  How  Improvements  in  Exchange  tend  to  bring  us  Back 

to  Barter 

The  processes  just  described  call  our  attention  to  a  curious 
tendency  in  modern  economic  life.  Clearly,  the  present  ten- 
dency, as  Stanley  Jevons  remarked,  is  to  do  away  with  the 
instrument  of  exchange  and  bring  us  back  to  the  direct 
exchange  of  commodity  for  commodity,  i.e.  to  barter. 
There  is,  indeed,  in  the  ingenious  and  complicated  processes 
which  are  the  latest  result  of  economic  evolution,  a  curious 
resemblance  to  the  primitive  methods  of  uncivilized  societies. 
This  is  not  the  only  respect  in  which  the  historical  develop- 
ment of  nations  displays  the  strange  phenomenon  that  human 
thought,  having  reached  the  end  of  a  certain  line  of  progress, 
returns,  as  it  were,  to  its  starting-point,  and  thus  describes 
one  of  those  great  circles  which  so  vividly  impressed  the 
imagination  of  Vico.  Progress  moves  in  a  circle,  or  it  at 
least  appears  to  suggest  a  rising  spiral.1 

Is  not  international  trade  now  really  carried  on  by  barter? 
Each  country  pays  for  most  of  its  imports  by  means  of  its 
exports;  in  other  words,  it  exchanges  its  own  products  for 
foreign  products.  (See  the  following  section,  page  301, 
note  1.) 

1  An  analogous  phenomenon  attracted  our  attention  when  discussing  the 
r61e  of  merchants  (page  207).  We  observed  that  social  evolution  gave  rise 
first  to  a  class  of  merchants  whose  function  it  was  to  facilitate  relations 
between  consumers  and  producers ;  then  we  remarked  that  the  same  evolu- 
tion tended  to-day  to  eliminate  this  class  of  merchants  and  to  bring  us  back, 
by  means  of  simple  and  more  effective  methods,  to  direct  contact  between 
consumer  and  producer.  Again,  cooperative  association  was  one  of  the  first 
forms  of  production;  yet  many  regard  it  as  the  industrial  form  of  the 
future. 

The  other  social  sciences  offer  quite  as  striking  examples  of  the  same  prin- 
ciple: e.g.  direct  government  by  the  people  in  antique  cities  reappears  in 
the  guise  of  the  referendum  in  our  modern  constitutions  ;  obligatory  military 
service  for  all  citizens  is  bringing  European  nations  back  to  the  state  of  things 
which  preceded  the  institution  of  permanent  mercenary  armies. 

Yet  the  contrary  thesis  is  upheld  by  Massart,  de  Moor,  and  Vandervelde  in 
their  book  on  UL' Evolution  regressive." 


CHECKS  287 

The  introduction  of  such  an  arrangement  as  that  outlined 
above,  by  which  all  citizens  have  accounts  at  the  same  bank, 
would  be  tantamount  to  a  system  of  barter,  since  under  it 
everybody  would  be  paying  for  the  products  or  services  of 
others  with  his  own  products  or  services. 

It  is  virtually  a  kind  of  barter  that  makes  the  check  system 
and  the  great  institution  of  the  clearing  house  possible.  Their 
nature  and  working  is  comparatively  simple. 

There  was  a  time  when  merchants  kept  their  money  in 
their  own  strong-boxes  and  paid  it  out  as  occasion  happened 
to  require.  But  in  the  course  of  time,  goldsmiths  obtained 
the  privilege  of  keeping  this  money  in  their  vaults,  subject 
to  the  demands  of  the  owner  ;  and  instead  of  paying  money 
from  their  own  safes  whenever  they  made  purchases,  mer- 
chants would  simply  give  their  creditors  an  order  on  the 
goldsmith,  calling  upon  the  latter  to  pay  the  requisite  amount 
to  the  bearer  of  the  order.  These  orders  or  checks,  the  im- 
portance of  which  has  steadily  increased  with  the  develop- 
ment of  trade,  now  serve  very  extensively  as  a  substitute  for 
money.  A  check  may  be  defined  as  an  order  on  a  bank  to 
pay  some  one  a  specified  sum  of  money.  It  can  be  drawn 
only  against  a  deposit  of  money  in  the  bank,  or  against  a 
credit  previously  agreed  to  by  the  banker.  By  means  of  the 
check  the  depositor  transfers  a  part  of  his  deposit  or  his 
credit  to  the  person  to  whom  the  check  is  payable. 

Suppose  that  A  purchases  fifty  dollars'  worth  of  goods 
from  B,  and  pays  with  a  check  for  that  sum ;  B,  in  turn, 
buys  fifty  dollars'  worth  of  goods  from  C,  and  uses  a  check 
in  payment ;  C  buys  fifty  dollars'  worth  of  goods  from  D 
and  pays  in  the  same  manner  as  A  and  B.  If  all  these 
checks  are  drawn  on  the  same  bank,  the  matter  is  perfectly 
simple.  Each  pierson  in  possession  of  a  check  will  deposit 
it  at  the  bank,  and  although  total  business  to  the  amount  of 
$  150  has  been  transacted,  it  will  only  be  necessary  for  fifty 
dollars  ultimately  to  change  owners.  D  will  be  fifty  dollars 
richer  than  before,  whereas  A  will  be  fifty  dollars  poorer. 


288  PRINCIPLES   OF   POLITICAL   ECONOMY 

B  and  C  may  be  regarded  as  having  merely  exchanged  goods 
for  goods,  as  under  a  system  of  barter. 

Now  suppose  that  each  of  these  persons  has  an  account  at 
a  different  bank.  The  recipient  of  the  check  in  each  case 
need  not  hurry  off  to  the  bank  upon  which  it  is  drawn; 
he  simply  deposits  it  at  his  own  bank,  a.nd  is  credited  for 
the  amount  of  the  check.  In  the  course  of  a  day's  busi- 
ness each  bank  in  this  manner  receives  a  great  variety 
of  checks  drawn  upon  all  the  banks  of  the  neighborhood, 
and,  sometimes,  checks  that  are  drawn  upon  distant  banks. 
Then  the  representatives  of  the  various  banks  meet  at 
the  clearing  house  and  balance  their  claims  against  each 
other.  It  will  be  found,  in  the  example  mentioned  above, 
that  B's  bank  has  a  claim  of  fifty  dollars  against  A's  bank, 
that  C's  bank  has  a  claim  of  fifty  dollars  against  B's  bank, 
and  that  D's  bank  has  a  claim  of  fifty  dollars  against  C's 
bank ;  but  all  that  is  necessary  is  for  A's  bank  to  pay  fifty 
dollars  to  D's  bank.  In  reality  the  matter  is  likely  to  be 
even  simpler  than  this,  for  each  bank  has  a  multitude  of 
claims  against  the  other  banks,  and  when  all  these  claims  are 
compared  little  money  need  be  paid  to  balance  them.  If  a 
bank  sends  to  the  clearing  house  checks  to  the  amount  of 
$20,000  and  finds  there  checks  drawn  against  itself  to  the 
amount  of  $22,000,  the  bank  will  be  indebted  to  the  clearing 
house  for  $2000,  which  balance  it  will  have  to  pay  in  money. 
If,  on  the  other  hand,  the  checks  drawn  upon  this  bank  had 
amounted  to  $18,000,  the  bank  would  have  received  the 
balance  of  $2000  from  the  clearing  house.  In  this  manner 
different  banks  very  conveniently  settle  all  their  mutual 
obligations  by  merely  paying  the  balances  against  them,  or 
receiving  balances  due  them,  at  the  clearing  house.  Banks 
situated  in  different  places  settle  their  accounts  with  almost 
equal  ease.  Banks  in  country  districts  have  agents,  or  corre- 
sponding banks,  in  the  nearest  clearing-house  city,  so  that 
every  clearing  house  performs  this  work  of  settling  accounts 
for  banks  of  the  adjacent  territory.  Then  the  New  York 


CLEARING   HOUSES  289 

clearing  house  acts  as  a  central  clearing  bouse  for  the  banks 
of  the  entire  country,  since  every  important  city  bank  corre- 
sponds with  some  New  York  bank  that  is  a  member  of  the 
clearing  house.  In  1902  the  total  transactions  of  the  clear- 
ing houses  of  the  country  amounted  to  $116,021,618,003. 
The  New  York  clearing  house  effected  $78,130,693,507.97  of 
these  transactions,  the  daily  average  being  $265,793,423.21, 
while  the  amount  of  money  actually  used  to  effect  this  vol- 
ume of  business  was  but  four  and  one-half  per  cent  of  that 
sum. 

Thus  the  clearing  house  really  reverts  to  a  sort  of  barter. 
These  huge  bundles  of  checks,  bills  of  exchange  and  negoti- 
able paper,  which  day  by  day  are  exchanged  for  each  other, 
simply  represent  innumerable  boxes,  bales,  barrels,  and  car- 
loads of  all  kinds  of  merchandise  which  have  been  exchanged 
for  each  other.  For  those  who  look  behind  the  mere  appear- 
ance of  things,  the  clearing  house  is  a  colossal  bazaar,  like 
those  which  exist  among  African  tribes  or  which  existed  in 
the  cities  of  antiquity.  The  only  difference  is  that  here 
not  the  goods  themselves  are  exchanged,  but  the  certificates 
that  represent  them. 

The  precious  metals,  to  be  sure,  although  they  are  losing 
their  position  as  instruments  of  exchange,  still  retain  their 
function  as  the  measures  of  value,  for  it  is  plain  that  the 
value  of  all  these  papers,  checks,  bank-notes,  etc.,  is  ulti- 
mately based  on  metallic  money.  Only,  this  basis  is  from 
day  to  day  becoming  more  narrow,  when  compared  to  the 
enormous  edifice  of  credit  that  has  been  built  upon  it.  The 
present  system  has  been  likened  to  a  pyramid,  resting  upon 
its  apex  and  constantly  growing  larger.  It  has  also  been, 
compared  to  a  top  turning  with  enormous  rapidity  on  a 
metallic  point,  so  that  its  equilibrium  is  fearfully  unstable ; 
as  soon  as  the  top  ceases  to  turn,  it  falls.1 

1  Mr.  Vanderlip,  former  Assistant  Secretary  of  the  United  States  Treasury, 
has  recently  given  what  he  called  a  conservative  note  of  warning  with  refer- 
ence to  the  inflation  of  credit  liabilities  in  this  country.  These  liabilities,  he 


290  PRINCIPLES    OF   POLITICAL    ECONOMY 

Nor  can  we  be  certain  that,  even  as  a  measure  of  value,  the 
precious  metals  will  not  some  day  lose  their  privileged  rank. 
We  can  readily  conceive  a  social  state  in  which  the  unit  of 
value  serving  as  the  basis  for  sales  and  purchases  will  be 
purely  nominal,  and  will  correspond  to  no  particular  piece  of 
money  in  circulation.  Money  of  account  of  this  kind  has  fre- 
quently been  employed:  the  mark  banco  of  the  mediaeval 
bankers,  the  livre  tournois  under  the  "ancien  regime"  in 
France,  and  the  modern  English  guinea  are  not  represented 
by  any  coin. 

Only  when  money  has  become  a  pure  abstraction  shall  we 
fully  attain  the  social  state  described  in  the  preceding  section 
of  this  book,  namely,  the  system  under  which  all  receipts 
and  payments  are  effected  by  a  thorough  system  of  book- 
keeping embracing  the  exchanges  of  all  members  of  the 
community. 

declared,  have  in  the  last  five  years  increased  $4,000,000,000.  There  has 
been  an  increase  of  $1,300,000,000  in  the  deposits  of  the  national  banks  alone 
during  the  last  two  years,  while  the  basis  of  gold  and  legal  tender  has  slightly 
decreased.  This  increase  of  bank  liabilities  and  bank  credits  has  been  caused 
in  a  great  measure  by  the  conversion  of  the  ownership  of  industrial  establish- 
ments into  shares  and  bonds,  that  is,  into  bank  collateral. 


CHAPTER  IV  — INTERNATIONAL   TRADE 


I.  The  Balance  of  Trade 

THE  term  balance  of  trade  designates  the  relation  between 
imports  and  exports.  Statistics  show  that  the  imports  and 
exports  of  a  country  are  rarely  equal.  The  balance  of  trade 
is  either  in  favor  of  exports  or  of  imports ;  that  is  to  say,  a 
nation  exports  more  than  it  imports,  or  imports  more  than  it 
exports.  The  latter  case  is  the  more  frequent.  The  United 
States,  however,  since  1893  has  always  imported  less  than  it 
exported ;  we  have,  in  other  words,  had  what  is  called  a 
"favorable  balance  of  trade."  During  the  last  five  fiscal 
years  of  our  foreign  commerce  the  value  of  merchandise 
exported  and  imported  was,  in  round  figures,  as  follows :  — 


TEAK 

1898 
1899 
1900 
1901 
1902 


Totals 


EXPORTS  IMPORTS 

$1,231,000,000  1616,000,000 

1,227,000,000  697,000,000 

1,394,000,000  850,000,000 

1,488,000,000  823,000,000 

1,382,000,000  903,000,000 

$6,722,000,000  $3,889,000,000 


These  figures  indicate  that  during  a  period  of  only  five 
years  the  United  States  has  sold  to  foreign  countries 
12,833,000,000  worth  of  goods  more  than  it  has  bought  from 
them ;  this  is  equivalent  to  an  average  annual  excess  of  ex- 
ports over  imports  amounting  to  more  than  $566,000,000. 
Must  we  therefore  conclude  that  foreign  nations  are  every 
year  obliged  to  pay  us,  on  an  average,  more  than  half  a  bill- 
ion dollars  in  money?  This  is  scarcely  probable,  for  the 
amount  of  money  circulating  in  this  country  has  not  in- 
creased perceptibly.  A  good  test  of  the  validity  of  the  as- 
sumption that  foreign  nations  pay  us  this  enormous  amount 

291 


EXPORTS 

IMPORTS 

$71,000,000 

$151,000,000 

84,000,000 

120,000,000 

105,000,000 

80,000,000 

117,000,000 

102,000,000 

98,000,000 

80,000,000 

292  PRINCIPLES    OF    POLITICAL   ECONOMY 

annually  is  furnished  by  the  statistics  of  gold  and  silver 
imports  and  exports.  (We  have  already  learned  that  in 
international  trade  paper  money  is  of  no  avail,  and  that 
international  engagements  must  be  met  in  gold  and  silver.) 
The  official  statistics  for  gold  and  silver  exports  and  imports 
during  the  last  five  fiscal  years  show,  in  round  numbers,  the 
following  totals :  — 

YEAR 

1898  .... 

1899 

1900  .... 

1901  .... 

1902  .... 

Totals        ....        $±75,000,000  $533,000,000 

The  excess  of  imports  over  exports  during  this  period 
was  158,000,000,  or  an  annual  average  of  little  more  than 
$11,000,000.  Thus  it  would  appear  that  we  are  annually 
selling  an  excess  of  $566,000,000  worth  of  merchandise  to 
foreign  nations,  and  receiving  $11,000,000  in  gold  and  silver 
in  payment  for  this  excess.  Such  a  conclusion  is  manifestly 
absurd.  Evidently,  drawing  conclusions  with  regard  to  the 
prosperity  of  a  nation  after  a  mere  glance  at  its  "balance 
'  of  trade "  is  not  quite  so  simple  a  matter  as  is  sometimes 
supposed. 

Let  us  now  consider  France  as  an  example  of  the  opposite 
state  of  affairs.  Here  are  the  figures  for  her  special  com- 
merce1 during  the  five  years  from  1897  to  1901,  in  round 
millions :  — 

YEAR 

1897  .... 

1898  .... 

1899  .... 

1900  .... 
1901 


EXPORTS 

IMPORTS 

$720,000,000 

$791,000,000 

702,000,000 

895,000,000 

831,000,000 

904,000,000 

822,000,000 

940,000,000 

833,000,000 

943,000,000 

Totals        ....     $3,908,000,000        $4,473,000,000 

1  General  commerce  means  all  imports  and  exports  without  exception, 
while  special  commerce  includes  only  those  commodities  that  have  been  pro- 


THE   BALANCE    OF   TRADE  293 

Thus  in  a  period  of  only  five  years  France  purchased 
abroad  §565,000,000  worth  of  goods  more  than  she  sold, 
which  amounts  to  an  annual  excess  of  imports  over  exports 
of  $113,000,000.  Must  we  conclude  from  these  figures  that 
France  is  annually  obliged  to  pay  this  amount  of  money  to 
foreign  countries  ?  The  most  superficial  observation  demon- 
strates that  the  amount  of  money  in  circulation  there  has 
not  diminished.  It  has  even  increased.  The  statistics  re- 
garding the  exports  and  imports  of  gold  and  silver  for  the 
same  period  as  that  considered  above  are  as  follows :  — 

YEAR 

1897  .'   . 

1898  .... 

1899  .... 

1900  .... 
1901 


EXPORTS 

IMPORTS 

$65,000,000 

$94,000,000 

100,000,000 

78,000,000 

76,000,000 

101,000,000 

67,000,000 

121,000,000 

57,000,000 

105,000,000 

Totals        ....        $365,000,000  $499,000,000 

The  supply  of  gold  and  silver  money  in  France,  therefore, 
has  increased  during  this  period  by  1134,000,000,  i.e.  nearly 
$27,000,000  annually. 

If  we  consider  the  case  of  England,  the  statistics  are  still 
more  surprising.1  The  annual  excess  of  imports  over  ex- 
ports averages  $1,200,000,000.  In  other  words,  one  year  of 
foreign  commerce  at  this  rate  would  suffice  to  drain  the 

duced  within  the  country,  or  will  be  consumed  there  ;  thus  special  commerce 
does  not  include  goods  that  simply  pass  through  the  country  or  that  remain 
there  temporarily.  Special  commerce  is  necessarily  less  extensive  than  gen- 
eral commerce.  In  France  the  difference  between  the  two  is  more  than 
$400,000,000.  In  some  countries  (such  as  Switzerland)  it  is  proportionally 
even  greater  than  this  because  of  their  geographical  position.  The  extent  of 
special  commerce  indicates  the  forwarding  trade  in  which  a  nation  engages. 
The  Netherlands  and  Belgium  each  derive  large  profits  from  the  forwarding 
trade. 

1  For  the  year  1901  the  imports  of  the  United  Kingdom  amounted  to 
$2,540,265,299,  whereas  the  exports  were  valued  at  $1,362,728,893, —  a  dif- 
ference between  the  two  of  $1,177,536,406. 

Doubtless  the  official  figures  are  not  exactly  correct ;  the  money  that 
travellers  carry  with  them,  for  instance,  is  not  included.  But  as  the  errors 


294  PRINCIPLES    OF   POLITICAL   ECONOMY 

country  twice  of  all  its  metallic  money ;  for  the  United 
Kingdom  has  but  1600,000,000  in  coin  of  all  kinds.  Yet 
this  money  is  by  no  means  drained  from  the  country  by 
foreign  trade.  On  the  contrary,  here,  as  in  France,  the  im- 
ports of  precious  metals  surpass  the  exports. 

What,  then,  is  the  key  to  the  enigma  ?  Simply  this :  In 
order  to  ascertain  whether  the  foreign  trade  of  a  country  is 
in  equilibrium,  we  must  consider  not  only  the  balance  of  its 
imports  and  its  exports,  —  as  the  public  is  accustomed  to 
doing,  —  but  the  balance  of  its  credits  and  its  debits.  Now 
the  balance  of  credits  and  debits  (or  the  balance  of  accounts) 
is  not  the  same  as  the  balance  of  trade.  To  be  sure,  expor- 
tation is  one  way,  and  the  chief  way,  of  making  foreign 
countries  our  debtors.  Yet  there  are  other  ways  of  doing 
this.  Similarly,  though  imports  constitute  our  principal 
debt  to  foreign  nations  they  are  not  the  sole  source  of  our 
indebtedness  to  them.  What,  then,  are  these  international 
claims  or  debts,  distinct  and  different  from  exports  and  im- 
ports, which  have  aptly  been  termed  invisible  exports  and 
imports  ?  They  are  numerous,  but  three  of  them  stand  out 
prominently  in  importance  :  — 

(1)  The  cost  of  transportation  of  exported  goods,  i.e. 
freight  and  insurance.  If  the  exporting  country  has  charge 
of  the  transportation  of  its  goods,  it  has  a  claim  on  other 
countries  that  certainly  will  not  be  counted  among  its  ex- 
ports, inasmuch  as  the  claim  arises  only  after  commodities 
have  left  the  home  port  and  are  on  the  way  to  their  destina- 
tion. On  this  account,  England  has  large  claims  against 
other  nations,  estimated  at  more  than  $440,000,000  per  an- 
num ;  for  England  not  only  carries  all  her  own  exports,  but 
also  transports  a  large  share  of  the  goods  of  other  countries ; 

or  omissions  are  probably  about  the  same  on  the  side  of  imports  as  on  that  of 
exports,  they  do  not  much  modify  the  general  result. 

Additional  proof  that  the  amount  of  money  in  France  has  not  decreased 
may  be  found  in  the  amount  of  cash  reserves  held  by  the  banks.  The  Bank 
of  France,  for  example,  which  thirty  years  ago  had  about  $200,000,000  in 
cash  on  hand,  now  has  three  times  that  amount. 


THE    BALANCE    OF    ACCOUNTS  295 

and  she  certainly  does  not  perform  this  service  gratuitously.1 
The  United  States,  on  the  other  hand,  pays  foreign  nations 
for  transportation  and  insurance,  more  than  $200,000,000 
annually.  France  pays  annually  to  foreign  nations  about 
§70,000,000  for  the  same  service,  since  she  transports  in  her 
own  vessels  only  half  her  exports  and  one-third  of  her 
imports.2 

(2)  The  interest  on  capital  invested  abroad.  Rich  coun- 
tries, and,  as  a  rule,  old  countries,  invest  abroad  a  large  part 
of  their  savings,  and  for  this  reason  receive  each  year  large 
amounts  of  money  or  of  commodities  from  foreign  nations. 
These  receipts  usually  take  the  form  of  stock  coupons,  shares, 
debentures,  farm  rents,  and  profits  in  industrial  and  commer- 
cial enterprises.  The  tribute  that  England  in  this  manner 

1  The  increased  value  of  merchandise  due  to  the  cost  of  transportation 
explains  the  following  fact,  which  at  first  sight  appears  inexplicable  :  When 
we  add  the  imports  and  exports  of  the  whole  world,  and  compare  the  total 
imports  with  the  total  exports,  we  find  that  imports  are  much  greater  than 
exports.     In  the  year  1901,  for  example,  the  value  of  the  world's  imports 
was  about  $10,300,000,000,  while  the  total  value  of  exports  during  the  same 
period  was  about  $8,800,000,000.     Now  if,  instead  of  comparing  the  values 
of  imports  and  exports,  we  compare  the  quantities,  it  is  evident  that  the  two 
totals  must  be  equal,  inasmuch  as  there  cannot  be  (for  the  world  as  a  whole) 
more  goods  arriving  than  have  been  sent  away,  unless,  forsooth,  their  quan- 
tity has  increased  while  on  the  way  to  their  destination  !    As  a  matter  of  fact 
some  goods  are  lost  under  way  because  of  shipwrecks,  waste,  etc.,  and  it  is 
therefore  very  probable  that  the  amount  of  goods  arriving  is  less  than  that 
which  was  sent.      But  as  the  above  estimates  consider  values  instead  of 
quantities,  and  as  values  increase  under  way  precisely  because  of  the  cost 
of  transportation,  it  is  not  surprising  that  the  goods  imported  (i.e.  which 
reach  their  destination)  possess  a  greater  value  than  those  exported  (i.e. 
which  are  taken  from  their  starting-point). 

2  The  report  of  the  United  States  Commissioner  of  Navigation  gives  the 
following  information  regarding  the  tonnage  of  the  merchant  navies  of  the 
principal  maritime   nations  in   1902 :    Great    Britain,    15,546,897 ;    United 
States,  5,797,902  ;  Germany,  3,138,568  ;  Norway,  1,632,757  ;  France,  1,519,922  ; 
Italy,  1,159,082;  Russia,  800,334;  Spain,  784,573. 

It  must  be  pointed  out,  however,  that  of  the  total  tonnage  for  the  United 
States,  less  than  8  per  cent  was  engaged  in  foreign  trade.  Before  the  Civil 
War,  in  the  days  of  wooden  ships  propelled  by  sails,  American  vessels  carried 
two-thirds  of  our  imports  and  exports  that  travelled  by  sea. 


296  PRINCIPLES    OF    POLITICAL   ECONOMY 

receives  each  year  from  foreign  countries  and  from  her  own 
colonies  is  estimated  at  $400,000,000.  India  and  the  Austra- 
lian colonies,  for  instance,  have  negotiated  in  England  almost 
the  sum  total  of  their  loans.  How  numerous,  moreover,  are 
the  enterprises  throughout  the  world  that  are  in  the  hands 
of  English  financiers  or  promoters  !  Englishmen  are  said  to 
have  acquired  land  in  the  United  States  having  a  total  area 
equal  to  that  of  Ireland.  France,  too,  has  numerous  claims 
on  foreign  nations,  chiefly  in  Europe ;  they  are  estimated  at 
more  than  14,000,000,000,  and  represent  an  annual  revenue 
of  1230,000,000.  Probably  13,000,000,000  of  foreign  capital 
is  invested  in  the  United  States,  and  this  amount  is  increased 
in  prosperous  years.  Thus  the  United  States  owes  about 
$120,000,000  annually  for  interest  on  foreign  capital. 

In  this  respect,  Spain,  Turkey,  Egypt,  India,  and  the 
South  American  republics  appear  as  debtors.  But  it  should 
be  observed  that  whenever  these  countries  issue  a  loan,  and 
so  long  as  this  loan  is  not  fully  subscribed,  they  become  for 
the  time  creditors  of  the  countries  which  take  up  the  loan 
and  which  therefore  send  them  funds. 

(3)  The  expenses  incurred  by  foreigners  living  in  the 
country.  As  the  money  spent  by  these  foreign  visitors  or 
residents  generally  is  not  the  product  of  their  labor  within 
the  country  but  is  drawn  from  their  estates  or  from  capital 
invested  at  home,  all  countries  which  are  resorted  to  by 
wealthy  foreigners  are  constantly  receiving  large  sums  of 
money  from  abroad.  When  brought  into  the  country  in 
the  pockets  of  visitors  or  sent  them  through  the  mails,  this 
money  does  not  figure  in  the  statistics  of  imports.  From 
this  point  of  view  France,  Italy,  and  Switzerland  are  credit- 
ors of  England,  the  United  States,  and  Russia  for  consid- 
erable amounts.  The  latest  French  census,  for  example, 
indicates  that  there  are  in  France  66,000  foreigners  living 
mostly  on  independent  incomes ;  the  number  of  those  that 
stay  but  a  short  time  is  certainly  much  larger  than  this. 
Now  suppose  that  each  of  these  foreign  residents  spends 


THE  BALANCE  OF  ACCOUNTS  297 

12000  a  year  (certainly  a  low  estimate  for  people  who  are 
there  for  amusement);  this  would  mean  an  annual  tribute 
of  1132,000,000  paid  by  those  who  are  staying  for  longer 
periods.  This  sum  comes  from  the  respective  home  countries 
of  these  foreigners  and  pays,  so  to  speak,  the  bill  for  their 
boarding  expenses  in  France. 

It  is  estimated  that  Americans  spend  about  $50,000,000  in 
foreign  travel  each  year,  and  that  tourists  spend  $40,000,000 
annually  in  Switzerland. 

These  are  the  principal  items  to  be  considered  in  this  con- 
nection.1 They  are  more  than  sufficient  to  restore  the  equilib- 
rium of  international  trade  and  solve  the  enigma  referred  to 
above.  If,  for  example,  in  the  case  of  France,  we  find  her 
debit  account  to  consist  of  $900,000,000  for  goods  imported, 
$72,000,000  for  the  transportation  of  goods  carried  under 
foreign  flags,  and  $100,000,000  (let  us  say)  for  French 
citizens  travelling  abroad,  or  for  French  property  held  by 
foreigners,  the  sum  total  of  debits  would  be  about  $1,070,- 
000,000.  If,  on  the  other  hand,  we  credit  her  with  exports 
to  the  value  of  $800,000,000,  plus  $220,000,000  as  interest  on 
French  capital  invested  abroad,  and  $132,000,000  spent  by 

1  There  are  other  kinds  of  credits  and  debits  besides  those  indicated  ;  for 
example  :  — 

(«)  Bankers'  commissions,  whenever  bankers  extend  their  business  to 
foreign  countries.  Stock-exchange  cities  like  London,  Paris,  and  Berlin 
receive  orders  and  transact  business  for  all  countries.  As  this  is  not  done 
gratuitously,  these  countries  become  to  some  extent  creditors  of  other 
countries. 

(5)  The  sale  of  ships.  Purchased  ships  do  not  figure  on  the  custom-house 
books  either  as  imports  or  exports.  England  builds  ships  for  many  other 
countries  and  on  this  score  too  is  a  creditor  for  large  amounts.  In  some  years 
more  than  1,000,000  tons  of  ships,  mostly  steam  vessels,  are  launched  from 
the  great  shipyards  at  Belfast  and  on  the  rivers  Clyde,  Wear,  Tees,  and  Tyne. 

We  must  be  careful,  however,  not  to  reckon  the  profits  of  exporters  under 
this  head,  though  many  treatises  on  political  economy  do  this.  These  prof- 
its are  already  included  in  the  value  of  exports,  and  to  count  them  again 
would  be  a  mistake.  The  value  of  exports  is  determined  by  the  customs 
officials  according  to  the  current  prices  of  commodities,  and  this  price  of 
course  covers  the  profits  of  manufacturers  and  dealers. 


298  PRINCIPLES    OF   POLITICAL   ECONOMY 

foreigners  living  in  France,  the  sum  total  of  credits  is  about 
11,150,000,000.  Thus  France  has  a  good  .balance  in  her 
favor.  A  similar  calculation  would  show  a  similar  state  of 
affairs  in  England,  and,  in  fact,  for  most  of  the  older 
European  creditor  nations  which  appear  to  have  an  "  unfavor- 
able balance  of  trade." 

We  must  therefore  conclude  that  the  foreign  trade  of  a 
country  is  in  equilibrium  not  when  exports  and  imports  are 
equal  in  value  (which  never  happens),  but  when  its  credits 
and  its  debits  are  equal. 

II.  How  the  Balance  of  Accounts  is  Maintained 

"We  must  abandon  the  old  and  s^psurd  idea,  often 
expressed  by  well-known  newspapers,  that  a  country  which 
imports  more  than  it  exports  is  rapidly  approaching  ruin. 
The  problem,  however,  is  merely  somewhat  altered  by  substi- 
tuting the  more  important  "balance  of  accounts"  for  the 
"balance  of  trade."  With  this  change  the  problem  reads: 
Is  there  risk  of  ruin  when  a  country  is  obliged, — all  things 
considered,  —  to  pay  foreign  nations  more  than  it  receives 
from  them? 

We  must  certainly  reply  affirmatively  to  this  question. 
If  a  nation  buys  more  abroad  than  it  sells,  and  has  no  other 
claims  on  foreign  nations  to  restore  the  balance  of  accounts ; 
or  if  its  rich  citizens  spend  their  incomes  abroad  (a  practice 
called  absenteeism*),  such  a  nation  will  be  compelled  to  ex- 
port its  metallic  money.  To  remedy  the  growing  scarcity 
of  metallic  money  it  will  probably  resort  to  the  issue  of 
paper  money.  But  as  this  paper  money,  although  it  will 
take  the  place  of  coin  in  interior  commerce,  cannot  be 
employed  to  pay  foreign  nations,  the  country  will  be 
obliged  to  borrow  abroad  the  sums  that  it  must  pay. 
Such  a  course  as  this  must  inevitably  lead  nations,  as 
it  does  lead  individuals,  to  bankruptcy.  Indeed,  it  would 
not  be  difficult  to  find  in  South  America,  and  even  in 


COUNTERACTING    TENDENCIES  299 

Europe,  many  examples  of  this.  Yet  we  must  recognize 
certain  counteracting  forces  which  operate  very  effectively 
and  which  tend  to  obviate  this  evil. 

Persons  who  have  payments  to  make  abroad  endeavor  to 
settle  them  by  some  other  means  than  the  exportation  of 
money,  because  sending  money  is  inconvenient,  and  because 
the  money  sent  is  not  generally  legal  tender  in  the  country 
where  the  debt  must  be  paid.  Therefore  debtors  try  to  buy 
bills  of  exchange  payable  in  these  foreign  countries,  in  order 
to  obviate-  the  danger,  inconvenience,  and  expense  of  trans- 
porting gold  and  silver.  Bills  of  exchange,  as  we  have  seen, 
form  the  ordinary  means. of  paying  international  debts.  But 
if  a  country  owes  more  abroad  than  foreign  nations  owe  her, 
it  is  clear  that  forAgn  bills  of  exchange,  i.e.  claims  on  foreign 
debtors,  will  be  relatively  scarce.  These  bills  will  therefore 
be  in  great  demand,  and  by  virtue  of  the  law  of  demand  and 
supply  they  will  sell  at  a  higher  price  than  their  normal 
value.  In  other  words,  they  will  be  at  a  premium.  Now  it 
is  plain  that  this  premium,  bringing  profit  to  all  those  dealers 
who  have  claims  on  foreign  nations  and  who  therefore  have 
bills  of  exchange  to  sell  (and  this  class  consists  evidently  of 
all  exporters),  will  stimulate  the  exportation  of  goods  to 
foreign  countries;  inversely,  the  necessity  to  pay  this  pre- 
mium, and  the  consequently  disadvantageous  situation  of  all 
those  who  must  make  payments  abroad  (that  is  to  say,  all 
importers),  will  discourage  imports.1  The  result  will  be  an 
increase  of  exports  and  a  decrease  of  imports, — precisely  the 
remedy  best  suited  to  the  situation. 

Nor  is  this  all.  Let  us  admit  that  the  inequality  of  debits 
and  credits  involves  a  continual  drain  of  money  from  a  coun- 
try. The  flight  and  consequent  scarcity  of  money  causes  a 
fall  in  prices ;  and  although  a  fall  in  prices  has  some  disad- 
vantages, yet  in  this  particular  case  it  has  the  advantage  of 
stimulating  purchases  by  foreigners,  since  trade  always  seeks 

1  For  the  understanding  of  this  and  the  succeeding  pages  it  would  be  well 
to  read  the  section  on  the  Rate  of  Exchange. 


300  PRINCIPLES    OF   POLITICAL    ECONOMY 

the  markets  in  which  one  can  buy  cheapest.  At  the  same  time 
the  amount  of  purchases  made  abroad  by  the  debtor  nation 
will  of  course  decrease,  because  commodities  can  now  be 
bought  quite  as  cheaply  at  home.  It  is  a  well-known  fact 
that  goods  are  not  taken  away  from  dear  markets  to  cheap 
markets,  any  more  than  water  runs  up  hill.  In  short,  the 
situation  just  described  tends  to  encourage  exportation  and 
discourage  importation  —  securing  the  same  beneficent  result 
as  that  discussed  in  the  preceding  paragraph. 

If  paper  money  has  been  issued  to  take  the  place  of  metal- 
lic money,  the  result  is  the  same.  Metallic  money  will  then 
be  at  a  premium ;  the  greater  the  amount  of  paper  money, 
the  higher  the  premium.  The  producers  of  a  country  find 
it  profitable  to  sell  abroad,  because  then  they  are  paid  in 
metallic  money,  which  brings  a  premium,  and  thus  involves 
additional  profit.  Hence  this  condition  of  affairs  encourages 
increased  exportation.  Importation,  on  the  other  hand,  is 
slackened,  because  foreign  producers  do  not  like  to  sell  in 
a  country  having  a  depreciated  paper  money ;  or  if  they 
do  sell,  they  raise  their  prices,  and  this,  again,  restricts 
sales. 

To  sum  up,  then:  There  is  a  sort  of  automatism  in  the 
balance  of  accounts  that  tends  to  restore  the  equilibrium 
whenever  it  is  disturbed  —  in  much  the  same  manner  that 
regulators  on  steam  engines  tend  always  to  maintain  a  uni- 
form speed.  The  current  of  trade  cannot  forever  continue 
in  one  direction  any  more  than  the  tide  of  the  sea ;  sooner 
or  later  it  must  change,  and  after  metallic  money  has  been 
taken  out  of  a  country  there  are  natural  forces  which  tend 
to  bring  it  back  again. 

Statistics,  as  well  as  simple  observation,  show  that  money 
plays  only  a  small  part  —  usually  less  than  10  per  cent  of 
the  total  amount  —  in  international  trade.  (See  page  284.) 
We  must  therefore  admit  that  the  balance  of  accounts 
regulates  itself,  and  that  credits  and  debits  tend  of  their 
own  accord  to  reach  an  equilibrium.  This,  in  fact,  is 


ADVANTAGES   OF   FOREIGN   TRADE  301 

what    the    school    of    Bastiat    would    call    an    "economic 
harmony." 1 

Experience,  moreover,  demonstrates  that  whenever  the 
ratification  of  a  commercial  treaty  or  any  other  circum- 
stance gives  rise  to  a  great  increase  of  imports,  this  is 
invariably  accompanied  by  a  corresponding  increase  of 
exports.  Whenever,  on  the  other  hand,  a  protective  tariff 
causes  a  decrease  in  the  volume  of  a  nation's  imports,  it 
is  a  natural  consequence  that  its  exports  will  likewise 
diminish. 

III.    The  Advantages  of  International  Trade 

We  have  seen  that  exchange  among  individuals  is  an 
indispensable  complement  of  the  division  of  labor,  and  that 
both  together  result  in  a  prodigious  increase  of  productivity. 
On  a  larger  scale,  the  same  thing  is  true  of  nations  as  well  as 
individuals.  Therefore,  prima  facie,  international  exchange 
offers  economic  benefits  similar  to  those  resulting  from  per- 
sonal and  domestic  exchange.  In  private  and  domestic 
trade,  men  exchange  goods  and  services  because  of  a  relative 
superiority  at  different  points.  In  international  trade,  this 
relative  superiority  may  be  due  either  to  better  natural 
facilities  and  resources  or  to  the  peculiar  aptitudes  of  the 
population  of  a  nation.  But  by  means  of  foreign  trade  the 
advantages  of  this  superiority  are  enjoyed  to  some  extent  by 
all  nations  that  exchange  with  one  another. 

It  is  strange  that  the  advantages  of  international  trade 
have  been  considered  from  two  precisely  opposite  points  of 

1  The  same  idea  as  that  explained  above  may  be  expressed  more  strikingly 
by  saying  that  international  trade,  except  for  the  superiority  of  methods 
employed,  always  tends  to  take  the  form  of  barter.  .  Indeed,  we  have  shown 
that  every  debt  to  a  foreign  country  gives  rise  to  the  exportation  of  goods  to 
that  country,  and,  vice  versa,  every  claim  against  a  foreign  country  leads  to 
the  importation  of  goods  from  that  country.  Of  course,  merchandise  is  not 
always  exchanged  for  merchandise,  inasmuch  as  services  are  often  given 
in  exchange  for  merchandise.  Switzerland,  in  exchange  for  the  money  of 
tourists,  gives  the  privilege  of  seeing  her  mountains  and  water-falls. 


302  PRINCIPLES    OF   POLITICAL   ECONOMY 

view.  The  classical  economists  consider  only  imports.  They 
regard  importation  as  the  object  and  the  raison  d'etre  of 
international  trade.  Exportation  is  but  a  means  —  the 
only  means  —  by  which  a  nation  can  procure  the  goods  it 
imports.  Exports,  in  other  words,  are  the  price  paid  for 
imports.  The  value  of  imports  above  and  beyond  that  of 
exports  exactly  measures  the  advantage  resulting  from 
international  trade.  To  acquire,  for  instance,  an  amount 
of  imported  merchandise  worth  $800,000,000  by  exporting 
goods  worth  only  $600,000,000,  is  an  operation  that  brings 
$200,000,000  profit  to  a  country.  The  less  we  give  in 
exchange  for  what  we  want,  —  so  reason  the  classical 
economists,  —  the  more  profitable  is  the  transaction. 

According  to  the  protectionists,  and  according  to  current 
public  opinion,  the  advantages  of  international  trade  must 
be  considered  from  the  view-point  of  exports.  Exports,  it 
is  held,  constitute  the  real  profit  of  international  trade. 
Imports  are  thus  regarded  only  as  a  necessary  evil  to  which 
a  nation  must  submit  whenever  it  cannot  produce  all  that 
it  needs  ;  but  a  nation  should  strive  to  reduce  its  imports  to 
the  lowest  possible  amount.  Exportation  means  increased 
wealth,  —  the  receipt  of  money  in  payment  for  goods  sold 
abroad.  Importation,  on  the  other  hand,  means  expense,  — 
the  payment  of  money  to  foreign  nations.  Hence  the  ad- 
vantage of  international  commerce  is  measured  by  the  sur- 
plus of  exports  over  imports,  —  of  receipts  over  expenditures. 
As  the  United  States  in  1902  exported  $480,000,000  worth 
more  of  goods  than  was  imported,  this  sum  indicates  the 
nation's  gain  in  international  trade  for  that  year. 

Both  of  these  opposite  points  of  view  are  false.  Both  are 
based  on  the  mistaken  assumption  that  a  nation  may  be 
regarded  in  the  same  light  as  an  individual.  A  great  coun- 
try cannot  be  likened  (as  the  classical  economists  are  fond 
of  doing)  to  a  person  carrying  on  trade  solely  as  a  means 
of  procuring  what  he  needs.  A  nation  does  not  export 
goods  merely  in  order  to  be  able  to  import  them,  but  be- 


ADVANTAGES   OF   IMPORTATION  303 

cause  exportation  furnishes  advantages  that  are  peculiar  to 
itself;  exportation  is  an  end,  an  object  of  itself,  not 
simply  the  means  to  an  end.  It  is  true  that  by  virtue  of 
the  principle  stated  in  the  previous  section,  exportation  in- 
directly gives  rise  to  a  corresponding  importation,  but  this 
result  is  due  to  economic  forces  quite  independent  of  the  will 
of  exporters  and  importers. 

Inversely,  the  second  point  of  view,  which  likens  a  great 
nation  to  a  store-keeper  who  buys  only  in  order  to  sell  again, 
and  whose  profit  consists  in  the  excess  of  the  selling-price 
over  the  purchase-price,  is  no  less  erroneous.  What  a 
singular  idea  it'  is  to  measure  the  benefits  of  exchange  and 
commerce  among  nations  just  as  one  would  measure  the 
profits  of  merchants !  This  conception  overlooks  the  fact 
that  the  profits  which  merchants  draw  from  their  transac- 
tions are  a  burden  for  both  producers  and  consumers.  Mer- 
chants certainly  are  entitled  to  receive  some  tribute  for  the 
social  service  which  they  render,  but  this  tribute  must,  never- 
theless, be  deducted  from  the  advantages  of  exchange.  If 
merchants  or  traders  made  no  profits  at  all,  exchange  would 
be  none  the  less  beneficial ;  nay,  it  would  be  even  more 
beneficial.  As  Cairnes  admirably  has  said,  to  measure  the 
advantages  of  trade  by  the  profits  of  traders  would  be  just  as 
reasonable  as  to  measure  the  advantages  of  education  by  the 
salaries  paid  to  teachers. 

In  fact,  the  advantages  of  international  trade  are  not 
susceptible  of  arithmetical  calculation ;  they  cannot  be 
measured  in  money.  They  are  too  complex  for  such  simple 
methods,  and  are  found  on  both  sides,  —  that  of  imports 
as  well  as  that  of  exports. 

The  following  are  the  advantages  of  importation :  — 

(1)  Additional  well-being,  whenever  we  have  to  do  with 

imported  goods  which  a  country,  because  of  its  soil  or  its 

climate,  could  not    have  produced  within  its  own  borders. 

There  are  innumerable  examples  of  this.      Without  inter- 


304  PRINCIPLES   OF   POLITICAL  ECONOMY 

national  commerce,  Holland  would  have  no  building  stone, 
Switzerland  would  have  no  coal,  most  European  countries 
would  have  no  tropical  fruit,  England  would  have  little 
lumber  and  no  wine,  Norway  would  have  no  salt,  France 
would  have  no  copper,  and  the  United  States  would  have 
no  tea  or  coffee,  —  the  list  would  be  long  if  wo  attempted  to 
make  it  at  all  complete.1 

(2)  Economy  of  labor.  This  is  true  whenever  wealth  is 
imported  that  could  be  produced  at  home  only  at  a  higher 
cost  than  abroad.  Erance,  for  example,  could  make  her  own 
machinery,  and  do  it  very  well;  yet  it  is  generally  more 
profitable  for  her  to  import  it  from  England  or  the  United 
States,  because  these  countries  are  not  only  better  provided 
by  nature  with  iron  and  coal,  but  also  possess  better  facili- 
ties for  manufacturing  goods  of  this  sort.2 

This  advantage  of  international  trade  ordinarily  presup- 
poses the  productive  inferiority  of  the  importing  nation,  as 
regards  the  product  imported.  Yet  this  is  not  an  indispen- 
sable condition  or  one  without  which  such  importation  would 
be  disadvantageous.  It  may  be  to  a  nation's  gain  to  obtain 
certain  goods  by  importation  even  though  it  be  capable  of 
producing  them  within  its  own  borders  under  more  favorable 
conditions  than  the  country  which  sends  them.  Suppose,  for 

1  Many  European  countries  have  too  small  a  territory  to  provide  food  for 
their  population.     In  order  to  feed  her  rapidly  increasing  population  England 
is  now  obliged  to  import  more  than  $1,000,000,000  worth  of  food  stuffs,  i.e. 
more  than  half  of  what  she  consumes  in  cereals,  meats,  drinks,  etc.     This  is, 
moreover,  a  fact  that  is  increasing  in  importance  in  all  populous  countries 
devoted  largely  to  manufacturing.     With  the  growth  of  population,  European 
countries  will  be  obliged  to  send  abroad  for  an  increasingly  large  part  of 
their  food-supply. 

2  This  advantage  is  the  only  one  recognized  by  the  classical  school  as 
resulting  from  international  trade.    Bastiat  formulated  it  in  this  manner : 
"obtaining  an  equal  satisfaction  with  less  effort."     John  Stuart  Mill,  in  a 
formula  slightly  different  but  in  substance  the  same,   put  it  in  this  way  : 
"obtaining  a  more  useful  employment  of  the  world's  productive  forces." 
Such  is  indeed  the  advantage  of  exchange  between  individuals,  as  we  have 
already  explained  (page  199) ;  it  is  like  an  extension  of  the  division  of  labor. 
But  this  point  of  view  is  insufficient,  and  even  incorrect,  for  international 


FOREIGN   TRADE   ECONOMIZES   LABOR  305 

instance,  that  Cuba  could  produce  wheat  under  more  favora- 
ble conditions,  i.e.  with  less  labor,  than  the  United  States : 
If,  for  example,  a  bushel  of  wheat  costs  one  day's  labor  in 
Cuba  and  two  days'  labor  in  this  country,  would  it  be  better 
for  Cuba  to  produce  her  own -wheat  rather  than  to  import 
it  from  this  country?  Not  necessarily.  Perhaps  Cuba  can 
procure  sugar  even  more  advantageously  than  wheat,  requir- 
ing only  half  a  day's  labor  to  produce  an  amount  of  sugar 
that  can  be  exchanged  for  a  bushel  of  wheat  from  the  United 
States.  In  this  event  it  will  be  more  profitable  for  Cuba  to 
raise  sugar  and  to  import  wheat,  inasmuch  as  she  can  thus 
purchase  with  half  a  day's  labor  what  otherwise  would  have 
cost  her  a  whole  day's  labor. 

It  may  thus  happen  that  a  country  in  all  points  superior  to 
its  neighbors  will  nevertheless  find  it  profitable  to  import 
goods  from  them.  For  even  in  this  case  a  country  will  gain 
by  devoting  itself  to  the  production  of  those  goods  in  which 
its  superiority  is  greatest,  and  selling  them  for  goods  in  the 
production  of  which  its  superiority,  although  real,  is  not  so 
great.1  In  this  case  exportation  would  be  only  a  means  to 
an  end. 

exchange.  Each  nation,  as  we  shall  see,  far  from  tending  to  a  more  detailed 
division  of  the  world's  labor,  seeks,  and  should  seek,  to  develop  its  economic 
autonomy. 

Again,  the  cost  of  production  cannot  serve  as  a  standard  in  international 
exchange,  any  more  than  it  can  so  serve,  ordinarily,  in  exchange  between  in- 
dividuals. Although  competition  is  supposed  to  keep  value  at  the  level  of 
the  cost  of  production,  it  does  so  only  on  the  assumption  that  labor  and  capital 
can  immediately  be  transferred  to  wherever  they  are  most  in  demand.  Now 
this  supposition,  which  is  very  imperfectly  realized  within  the  borders  of  a 
single  nation,  becomes  absurd  when  applied  to  international  commerce.  It 
therefore  still  remains  to  be  discovered  how  values  are  determined  in  inter- 
national trade.  This  difficult  problem  is  discussed  at  some  length  by  Ricardo, 
John  Stuart  Mill,  Cairnes  ("  Some  leading  Principles  of  Political  Economy  ") 
and  Cournot  ("  Principes  mathematiques  de  la  the'orie  des  richesses," 
Chapter  12). 

1  The  same  thing  is  true  of  individuals.  A  physician  may  also  be  a  very 
expert  gardener ;  yet  it  may  be  best  for  him  to  entrust  his  garden  to  a 
gardener  less  expert  than  himself  in  order  to  devote  all  his  time  to  his  patients. 


306  PRINCIPLES   OF   POLITICAL   ECONOMY 

Another  advantage  of  international  commerce  closely  allied 
with  those  indicated  above,  consists  in  the  circumstance  that 
whenever  an  accident  of  any  sort  unexpectedly  reduces  the 
productivity  of  one  country,  it  may  depend  on  others  to  remedy 
this  accident,  which,  in  the  absence  of  international  commerce, 
might  have  the  most  disastrous  consequences.  Thus  interna- 
tional commerce  provides  a  kind  of  assurance  against  famines, 
against  the  effects  of  the  failure  of  crops,  and  against  a  mul- 
titude of  economic  misfortunes  the  effects  of  which  are  either 
attenuated  or  entirely  prevented  by  trade  between  nations. 
This  advantage  of  international  trade  cannot  be  measured  in 
dollars  and  cents,  and  is  sometimes  entirely  overlooked. 

Under  the  head  of  economy  in  labor,  it  should  be  noted 
that  although  a  nation  could  perhaps  produce  a  sufficient 
quantity  of  many  commodities  which  it  at  present  imports, 
the  quantity  produced  at  home  could  be  increased  only  at 
a  very  great  cost  of  labor  and  capital  and  a  consequent  in- 
crease in  prices.  The  United  States,  for  example,  imports  a 
large  quantity  of  lead.  It  is  probable  that  if  it  were  neces- 
sary we  could  produce  almost  enough  lead  for  the  home 
market.  If  imports  were  cut  off  and  we  were  required  to  do 
this,  it  would  mean  the  exploitation  of  mines  which  now  do 
not  give  sufficient  returns  to  pay  for  the  labor  and  capital 
necessary  to  work  them.  Cut  off  our  foreign  trade  in  lead, 
and  it  would  be  necessary  to  work  these  poorer  mines,  despite 
the  greater  cost ;  and  as  this  increased  cost  of  mining 
must  be  borne  by  the  consumers  of  lead,  the  price  would 
immediately  rise  to  a  level  sufficient  to  make  lead-mining 
remunerative  in.  the  case  of  the  poorest  mine  that  is  worked, 
but  whose  output  is  necessary  to  satisfy  the  demand.  The 
cessation  of  foreign  trade  would  in  this  manner  involve  a 
great  increase  in  the  price  of  many  commodities  which  are 
now  in  part  imported  from  other  nations. 

As  for  exportation,  the  following  are  its  advantages: — 

(1)  It  utilizes  natural  resources  and  productive  forces 
which,  if  there  were  no  outlet  for  them  in  foreign  countries, 


ADVANTAGES   OF   EXPORTATION  307 

would  be  superabundant  and  therefore  partially  useless. 
Were  it  not  for  exportation,  Peru  would  not  know  what  to 
do  with  her  guano  and  her  nitrates,  nor  Australia  with  her 
wool,  nor  Spain  with  her  wines,  nor  California  with  her  gold, 
nor  Pennsylvania  with  her  iron  and  steel,  nor  Minnesota 
with  her  flour,  nor  the  southern  states  with  their  cotton. 

(2)  It  develops  a  nation's  industry.  We  have  already 
explained  (page  176)  that  the  extent  of  the  division  of  labor 
and  the  progress  of  large-scale  production  are  proportionate 
to  the  size  of  the  market.  The  division  of  labor  cannot  be 
at  all  detailed  when  the  market  is  small,  whereas  with  every 
extension  of  the  market  a  more  elaborate  division  of  labor 
and  the  introduction  of  more  expensive  but  in  the  long  run 
more  productive  processes  and  machinery  becomes  possible. 
International  trade,  by  creating  world- wide  markets  for 
goods,  tends  to  develop  the  division  of  labor ;  it  leads  to  a 
fuller  utilization  of  the  possibilities  of  the  soil  and  the  popu- 
lation, to  the  completer  development  of  acquired  aptitudes, 
and  hence  to  a  great  increase  of  the  productive  energy  of 
humanity.  England  could  never  have  become  the  great 
manufacturing  nation  that  she  now  is,  did  she  not  export 
goods  to  all  parts  of  the  world.  The  possession  of  an  ex- 
tensive market  made  it  possible  for  her  to  make  immediate 
and  profitable  use  of  the  latest  inventions  and  improvements 
in  manufacturing.1 

IV.   Why  International  Trade  necessarily  is  Detrimental  to 
Some  Persons 

It  must  not  be  inferred  from  the  above  discussion  that 
international  trade  is  always  beneficial  to  everybody.  That 
would  be  to  misunderstand  its  effects.  In  fact,  it  follows 

1  Professor  Leroy-Beaulieu  maintains  that  international  trade,  especially 
international  free  trade,  intensifies  competition,  makes  coalitions  and  trusts 
among  producers  difficult,  propagates  the  best  industrial  and  agricultural 
methods,  and  stimulates  all  branches  of  human  activity.  ("  Economic  poli- 
tique,"  Vol.  IV,  pages  80,  etc.) 


308  PRINCIPLES   OF   POLITICAL  ECONOMY 

from  our  explanation  that  one  effect  of  international  trade  is 
to  economize  a  certain  amount  of  labor.  Now  as  our  modern 
societies  are  based  on  the  division  of  labor,  it  is  evident  that 
labor  cannot  be  economized  without  throwing  a  certain  class 
of  laborers  out  of  employment. 

If  the  United  States  should  increase  its  imports  of  cotton 
manufactures  from  Great  Britain  by  $20,000,000  annually," 
this  would  be  advantageous  to  American  consumers  and 
to  the  country  in  general  if  it  made  cotton  goods  obtainable 
at  a  smaller  cost  and  for  less  labor  than  would  otherwise 
be  the  case.  But  an  increase  in  the  importation  of  these 
goods  means  loss  of  employment  for  American  workmen 
engaged  in  this  branch  of  production.  It  is  true  enough  (as 
we  explained  in  a  previous  section  of  this  book)  that  an 
increase  of  imports  gives  rise  to  a  counter-current  of  exports, 
and  that  these  English  cotton  manufactures  would  doubt- 
less be  paid  for  with  American  cereals  or  American  cattle, 
which  would  have  to  be  raised  for  that  purpose.  But  we 
must  not  forget  that  cotton  goods  imported  from  England 
represent  a  lower  value  than  the  American  cottons  which 
they  supplant  in  the  market ;  else  they  would  not  success- 
fully compete  with  American  goods.  Perhaps  our  home 
manufacturers  could  not  produce  these  $20,000,000  worth 
of  cotton  goods  for  less  than  $30,000,000.  To  balance  this 
amount  of  English  imports,  however,  there  will  be  a  counter- 
current  of  American  exports  amounting  to  only  $20,000,000. 
In  other  words,  the  final  result  would  be  a  diminution 
of  home  production  to  the  extent  of  $10,000,000  and  a 
corresponding  reduction  in  the  amount  of  American  labor 
required. 

If  there  were  no  other  effect  but  this  displacement  of 
labor,  which  is  perfectly  obvious,  this  in  itself  would  be  a 
grave  injury  to  some  classes  of  our  population.  The  owners 
of  our  cotton  mills,  moreover,  unable  to  change  their  build- 
ings into  wheat  farms  or  pasture  lands,  evidently  would 
lose  the  capital  that  is  invested  in  these  factories.  As  the 


EFFECTS   OF   FOREIGN   TRADE  309 

laborers  in  their  employ  are  not  in  a  position  to  take  up 
farming  or  cattle-raising  for  English  consumers,  it  is  by  no 
means  certain  that  they  will  find  other  employment.  Thus, 
the  consequence  is  likely  to  be  ruin  for  the  employers  and 
idleness  and  poverty  for  the  employees. 

There  are,  however,  a  few  attenuating  circumstances  not 
to  be  overlooked.  It  may  be  said  that  international  trade, 
like  machinery,  may  ultimately  cause  an  increase  in  the 
amount  of  work,  which  it  began  by  diminishing.  It  may 
do  this  in  two  ways:  — 

(1)  The  fall  in  prices  resulting  from  free  trade  will  cause 
an  increase  in  consumption  and,  consequently,  an  increase  in 
production.     A  decline  in  the  price  of  cotton  goods  will  lead 
to   increased   purchases  either  of  cotton  goods  or  of  other 
commodities.     What  the  people  save  in  the  decreased  price 
of  cotton  goods  they  will  perhaps  use  to  purchase  goods  of 
home  production.     And  even  if  the  savings  are  used  to  buy 
foreign  goods,  and  not  American  products,  it  will  neverthe- 
less be  necessary  to  pay  for  this  larger  bulk  of  imports  by 
exporting   larger   quantities   of   American   goods.      In  the 
case  discussed   above,  the  exports  of  American  wheat  and 
cattle  may  be  increased  not  merely  by  $20,000,000,  but  by 
$80,000,000. 

(2)  The  fall  in  prices  diminishes  the  expenditures  of  those 
that  consume  the  commodity  in  question.     The  consumers 
are  therefore  enabled  to  devote  the  amounts  saved  to  produc- 
tive enterprises,  old  or  new.     Increased  productive  capital 
means  the  employment  of  additional   labor.      In  this  case, 
too,   the   work   that   has   been   taken  from  the  laborers  is 
restored  to  them  by  the  growth  of  other  branches  of  pro- 
duction ;  and  thus  it  is  probable  that  the  national  labor  will 
not  be  reduced  at  all. 

Not  only  importation,  but  also  exportation,  may  have 
undesirable  effects.  Countries,  for  example,  which  regu- 
larly export  cereals  (like  the  United  States  and  Russia) 
may  ultimately  impoverish  their  soil  and  rob  it  of  all  the 


810  PRINCIPLES   OF   POLITICAL   ECONOMY 

fertile  properties  that  it  possesses.  These  properties  are 
removed  in  part  with  each  crop  that  is  taken  from  the 
land.1  It  may  almost  be  said  that  such  countries  are  gradu- 
ally exporting  their  soil  itself.  Peru,  which  has  already 
exported  all  of  her  guano,  is  now  rapidly  exhausting  her  sup- 
ply of  nitrates,  consuming  in  the  most  improvident  fashion 
the  stores  of  wealth  that  nature  has  given  her. 

V.   The  History  of  Protectionism 

During  antiquity  and  the  Middle  Ages  international  trade 
was  not  so  widespread  as  it  is  to-day.  It  was  in  the 
control  of  a  few  small  countries,  —  Tyre  and  Carthage  in 
antiquity,  the  Italian  and  Hanseatic  cities  in  the  Middle 
Ages,  and  Holland  at  the  beginning  of  the  modern  epoch. 
These,  by  reason  of  their  maritime  situation,  acquired  a  mo- 
nopoly of  commerce  and  transportation.  The  other  peoples 
merely  played  a  passive  part ;  they  received  foreign  traders 
in  very  much  the  same  way  that  tribes  of  African  negroes 
now  receive  European  or  Arabian  merchants,  i.e.  with  some 
degree  of  friendliness  because  they  are  thus  enabled  to  pro- 
cure commodities  which  would  otherwise  be  unobtainable. 
Sometimes  non-commercial  peoples  even  sought  to  attract 
foreign  merchants  by  granting  them  certain  privileges. 
They  always,  however,  required  foreign  merchants  to  pay 
special  taxes  or  fees  in  exchange  for  the  protection  or  privi- 
leges afforded ;  these  taxes  were  a  kind  of  obligatory  profit- 
sharing.  Precisely  the  same  thing  is  done  nowadays  by 
African  chieftains  who  tax  the  caravans  which  pass  through 

1  Henry  C.  Carey  has  emphasized  these  considerations  and  made  them 
part  of  his  argument  for  protection.  All  the  articles  derived  from  the  land 
are  really  separated  parts  of  it,  which  must  be  restored  on  pain  of  its  exhaus- 
tion. Hence,  declares  Carey,  the  producer  and  the  consumer  must  be  close 
to  each  other  ;  the  products  must  not  be  exported  to  a  foreign  country  in 
exchange  for  its  manufactures,  and  thus  go  to  enrich,  as  manure,  a  for- 
eign soil.  In  immediate  exchange  value  the  landowner  may  gain  by  such 
exportation,  but  the  productive  powers  of  the  land  will  suffer. 


THE  RISE   OF   MERCANTILISM  311 

their  dominions.  Thus  customs  duties  —  if  we  may  apply 
this  name  to  these  early  forms  of  compulsory  tribute  —  were 
originally  mere  fiscal  taxes  and  in  no  wise  protective.  What, 
indeed,  could  they  have  protected? 

With  the  development  of  great  nations  during  the  six- 
teenth and  seventeenth  centuries,  however,  the  problem  of 
customs  duties  acquired  a  different  character  for  the  follow- 
ing three  reasons :  — 

(1)  Because  the  great  nations  of  Europe  endeavored  to 
form  national  markets,  closed  to  the  outside  world,  produc- 
ing whatever  they  required  and  sufficing  unto  themselves. 

(2)  Because    the    great    importance    attributed    to    the 
precious   metals,   gold   and   silver,    after    the    discovery   of 
America,  led  to  the  idea  that  a  nation  should  buy  as  little 
as  possible  abroad  in  order  not  to   be   obliged   to   export 
metallic  money. 

(3)  Because  the  opening  of  the  world's  great  maritime 
routes  led  to  an  unprecedented  development  of  international 
commerce.     Competition  between  nations,  which  could  not 
exist  when  commerce  was  limited  chiefly  to  the  transporta- 
tion of  articles  of  luxury  (such  as  Tyrian  purple,  Venetian 
brocades,  Toledo  blades,  etc.)  became  a  factor  of  importance 
when    commerce    was    sufficiently    developed    to    transport 
articles  of  more  general  use  (such  as  Flemish  cloths). 

We  have  already  referred,  in  our  sketch  of  the  history  of 
economic  doctrines,  to  mercantilism  (page  7),  which  arose 
during  the  sixteenth  century.  The  mercantilists  exagger- 
ated the  importance  of  money  and  of  foreign  trade  as  a 
means  of  procuring  money.  This  undue  emphasis,  however, 
was  not  so  absurd  as  some  authors  have  maintained,  for  at 
a  time  when  commerce  had  barely  begun,  when  the  great 
nations  of  Europe  were  being  formed  into  powerful  states, 
when  taxation  in  money  had  just  taken  the  place  of  taxation 
in  products  or  in  labor,  a  great  increase  in  the  amount  of 
money  in  a  country  was  indispensable.  Soon  afterward, 
another  matter  began  to  receive  the  attention  of  statesmen, 


312  PRINCIPLES    OF    POLITICAL   ECONOMY 

namely,  the  desire  to  place  the  nation  in  a  position  of  eco- 
nomic self-sufficiency.  This  ambition  may  properly  be 
regarded  as  the  original  germ  of  the  protectionist  idea.  It 
must  be  observed,  moreover,  that  in  pursuing  this  aim  men 
were  simply  carrying  out  the  natural  order  of  economic 
evolution,  which  has  constantly  been  widening  the  economic 
group :  first  it  was  the  family  that  formed  an  autonomous 
economic  unit,  then  the  village  or  town  community,  then  the 
national  market.  To-morrow,  perhaps,  the  economic  unit 
will  consist  of  the  whole  Western  world.  (See  the  section 
on  the  History  of  Exchange,  page  184.) 

It  was  therefore  natural  that  statesmen  should  conceive  the 
idea  of  employing  customs  duties  as  a  means  of  excluding 
foreign  competition  and  developing  the  economic  possibili- 
ties of  a  nation.  Customs  duties  lost  their  fiscal  character 
and  became  protective.1  In  England,  Cromwell,  and  in 
France,  Colbert,  were  the  first  statesmen  to  devise  a  genuine 
protective  system.  Colbert  himself  formulated  the  principal 
objects  of  the  protective  system  under  three  heads  :  — 

(1)  To  prevent  the  importation  of  manufactured  goods 
by  means  of  protective  duties. 

(2)  On  the  other  hand,  to  favor  the  importation  of  raw 

1  Customs  duties  may  of  course  still  have  a  fiscal  character,  making  them 
what  in  this  country  is  known  as  "tariff  for  revenue."  Thus  England, 
although  asserting  that  she  has  absolute  free  trade,  puts  a  duty  on  certain 
products  (tea,  coffee,  sugar,  tobacco,  and  wine),  and  in  this  way  collects  a 
revenue  amounting  to  about  $100,000,000.  Yet  these  duties  have  a  purely 
fiscal  character,  because  England  does  not  wish  to  produce,  or  could  not  pro- 
duce, any  of  these  commodities  on  her  own  soil. 

Whenever  a  government  is  about  to  introduce  customs  duties,  it  is  very 
important  to  know  just  what  character  these  duties  shall  have.  This  is  no 
mere  question  of  names.  For  when  duties  are  to  be  primarily  fiscal,  the 
government  should  lower  them  to  a  level  that  will  encourage  the  importation 
of  the  products  taxed ;  experience  has  shown  that  when  taxes  of  any  kind 
have  for  their  object  the  production  of  a  maximum  of  revenue  (postal 
charges,  for  example),  the  proceeds  of  the  tax  generally  are  highest  when 
the  tax  is  most  moderate.  If,  on  the  other  hand,  it  is  intended  that  duties 
shall  have  a  protective  character,  the  government  should  raise  them  high 
enough  to  restrict  the  importation  of  the  commodities  that  are  taxed. 


OBJECTS    OF   COLBERTISM  313 

materials,  and  all  commodities  used  in  manufacturing,  by 
reducing  duties  and  all  other  charges  which  might  restrict 
such  importation. 

(3)  Above  all,  to  encourage  the  exportation  of  national 
products  by  reducing  taxes,  or,  if  need  be,  by  granting  sub- 
sidies and  bonuses. 

This  system,  which  is  sometimes  designated  as  Collertism, 
reigned  supreme  until  the  "  economists  "  made  their  appear- 
ance. We  know  that  the  latter  (see  page  23)  took  as  their 
motto  the  rule,  "laisser  faire,  laisser  passer,"  and  that  they 
fought  quite  as  energetically  for  free  trade  (as  opposed  to 
protectionism)  as  they  did  for  freedom  of  labor  (as  dis- 
tinguished from  the  guild  system).  But  the  French  Revo- 
lution,  which  led  to  the  triumph  of  their  doctrine  with  regard 
to  the  freedom  of  labor,  did  not  by  any  means  inaugurate 
free  trade.  Twenty  years  of  European  war  were  ill  suited 
to  the  propagation  of  the  idea  that  there  should  be  free  and 
unrestricted  commerce  among  nations. 

In  England,  however,  the  ideas  of  Adam  Smith  spread  rap- 
idly. In  1838,  at  Manchester,  Cobden  began  the  remarkable 
campaign  that  was  destined  to  overthrow  the  system  of  pro- 
tection. He  very  adroitly  chose  the  field  of  combat  by  direct- 
ing his  attacks  solely  against  the  protective  duty  on  "  corn."  * 
It  was  indeed  a  particularly  odious  spectacle  to  behold  the 
rich  lords  of  England,  owners  by  right  of  conquest  of  nearly 
all  the  land  of  the  kingdom,  keep  out  foreign  wheat  in  order 
to  sell  their  own  more  dearly  or  to  collect  higher  rents,  and 
thus  profit  by  the  growing  need  of  the  population  for  food. 
The  House  of  Lords  found  that  it  could  with  poor  grace 
resist  the  popular  indignation  fostered  by  the  "Anti-corn- 
law  League  "  in  1846 ;  and  when  Sir  Robert  Peel,  the  prime 
minister,  was  converted  to  the  popular  cause,  the  lords  were 
obliged  to  yield.  Once  the  duty  on  wheat  was  abolished, 
all  the  rest  of  the  English  protectionist  system  (including 

1  In  England  the  word  "corn "  means  either  wheat,  barley,  rye,  and  oats 
collectively,  or,  more  specifically,  wheat. 


314  PRINCIPLES   OF   POLITICAL   ECONOMY 

the  famous  Navigation  Acts  of  Cromwell,  to  which  the  mari- 
time greatness  of  England  has  been  attributed)  fell  to  pieces. 

In  France,  a  league  founded  by  Bastiat  in  1846,  and  mod- 
elled on  the1  English  Anti-corn-law  League,  failed  because 
the  social  conditions  were  entirely  different  from  those 
which  prevailed  in  England.  But  Emperor  Napoleon  III, 
whose  policy  was  founded  on  an  alliance  with  England,  and 
whose  tendencies  were  rather  democratic,  took  advantage  of 
the  power  conferred  on  him  by  the  French  Constitution,  and 
without  consulting  the  Chamber  of  Deputies,  signed  a  com- 
mercial treaty  with  England.  This  celebrated  treaty  of 
1860,  for  which  the  French  people  were  very  unenthusiastic, 
gave  rise  to  considerable  comment  in  Europe  and  was  imme- 
diately followed  by  the  signing  of  analogous  treaties  by  most 
European  powers.  There  seemed  to  be  every  indication 
that  the  era  of  free  trade  had  fairly  begun  and  that  it  would 
long  continue. 

Yet  its  rule  was  of  brief  duration.  The  United  States, 
as  we  shall  see  presently,  after  the  Civil  War,  resolutely 
adopted  a  strong  protectionist  policy,  and  has  since  then 
persevered  along  the  same  line.  In  1872,  after  the  Franco- 
Prussian  War,  France,  under  the  government  of  Thiers, 
tried  to  follow  the  example  of  the  United  States  by  levying 
upon  foreign  imports  the  taxes  designed  to  pay  for  the  un- 
successful war  that  had  just  been  terminated.  This  effort 
failed  because  of  the  treaties  still  in  force.  In  1879  Ger- 
many, on  the  initiative  of  Bismarck,  inaugurated  the  return 
of  European  nations  to  a  decidedly  protectionist  policy,1 
and  her  example  led  almost  immediately  to  the  adoption  of 
a  similar  policy  by  most  nations  of  Europe,  just  as  the  ex- 
ample of  France  in  1860  had  led  to  the  general  adoption 
of  the  free  trade  system.  There  are  now  few  nations  in 
Europe,  —  except  England,  Holland,  Norway,  and  Denmark, 
—  that  have  remained  faithful  to  free  trade ;  everywhere 

1  In  point  of  date,  Austria  was  the  first,  by  adopting  the  tariff  of  June  27, 
1878  ;  but  her  example  had  much  less  influence  than  that  of  Germany. 


EARLY    AMERICAN   TARIFFS  315 

else,  even  in  Switzerland,  tariff  barriers  have  been  raised 
and  tariff  wars  have  taken  the  place  of  commercial  treaties.1 

From  the  very  start  the  foreign  commercial  policy  of  the 
United  States  has  been  more  or  less  protectionist.  Hamil- 
ton's celebrated  Report  on  Manufactures  was  a  clear  state- 
ment of  the  protectionist  theory,  and  not  the  least  remarkable 
of  its  author's  state  papers.  Our  constitution  forbade  the 
imposition  of  export  duties,  but  lodged  in  the  hands  of 
Congress  exclusive  power  to  levy  import  duties.  The  first 
tariff  measure  brought  before  Congress  was  introduced  by 
James  Madison  and  passed  on  July  4,  1789.  It  provided  for 
the  "encouragement  and  protection  of  manufactures."  The 
protection  afforded  by  this  measure,  however,  could  not  have 
been  very  great,  inasmuch  as  the  general  level  of  duties  was 
but  5  per  cent  ad  valorem,  and  the  highest  rates  on  luxuries 
did  not  rise  above  15  per  cent.  These  rates  were  soon 
found  insufficient  to  provide  the  necessary  revenue,  and  were 
subsequently  increased.  Between  1789  and  1812,  thirteen 
tariff  laws  were  enacted  by  Congress ;  the  general  purpose 
of  these  laws  was  to  increase  the  duties  and  the  number  of 
dutiable  articles,  —  primarily  in  order  to  meet  the  expenses 
of  the  government,  but  also  in  order  to  protect  American 
industries. 

The  reports  made  by  the  committees  of  Congress  and  the 

*Even  in  England  the  government  has  decided  to  reestablish  customs 
duties  on  cereals  in  order  to  pay  the  expenses  of  the  South  African  War. 

Customs  duties  are  established  by  law.  They  are  either  ad  valorem,  i.e. 
proportionate  to  the  value  of  goods,  or  specific,  i.e.  determined  by  the  weight 
or  volume  of  goods.  The  first  are  more  equitable,  the  second  more  simple. 
But  it  is  no  easy  matter  to  apply  the  law  justly  in  either  case.  In  the  first 
place,  ad  valorem  duties  give  rise  to  false  declarations  of  the  value  of  goods. 
In  order  to  prevent  this  the  customs  officials  sometimes  possess  the  right  of 
preemption,  by  which  they  can  purchase  imported  goods  at  their  estimated 
value ;  this  rule,  however,  has  little  effect.  When,  on  the  other  hand, 
duties  are  specific,  i.e.  determined  by  the  number,  weight,  or  volume  of  cer- 
tain kinds  and  classes  of  goods,  it  is  necessary  to  prepare  complicated  and 
lengthy  classifications  of  goods  ;  and  even  then  there  are  apt  to  be  instances 
of  flagrant  injustice.  The  present  system  in  this  country  is  a  combination  of 
both  kinds  of  duties. 


316  PRINCIPLES   OF   POLITICAL    ECONOMY 

subsequent  debates  thereon  indicate  very  clearly  that  the 
protection  of  American  industries  against  foreign  competi- 
tion was  a  principle  very  widely  accepted.  The  restriction 
of  our  foreign  commerce,  due  to  the  embargo  policy  of  1807 
and  the  war  of  1812,  was  equivalent  to  a  rude  but  vigor- 
ous application  of  protection.  During  this  period,  Northern 
capitalists  had  been  obliged  to  find  new  means  of  employ- 
ment for  their  idle  funds,  which  could  no  longer  be  profitably 
invested  in  the  shipping  interest.  They  turned  their  atten- 
tion to  manufacturing  enterprises,  and  established  the  textile 
industries  of  the  North.1  But  when  peace  was  concluded, 
British  manufacturers  sent  immense  quantities  of  goods  to 
American  ports,  and  the  Northern  manufacturers  saw  the 
market  for  their  cottons,  woollens,  and  iron  rapidly  slipping 
from  them.  They  therefore  appealed  to  Congress  for  aid  in 
the  shape  of  a  protective  tariff  which  would  preserve  the 
home  market  to  them.  One  result  of  this  appeal  was  the 
tariff  act  of  1816,  which  imposed  a  duty  of  about  20  per 
cent  on  all  cotton  and  woollen  goods  imported  from  abroad, 
and  specific  duties  on  salt  and  iron.  Thus  the  tariff  became 
distinctly  protective. 

By  1824,  eight  years  after  the  tariff  act  of  1816,  of 
which  Calhoun  had  been  one  of  the  chief  supporters,  the 
Southerners  became  the  declared  enemies  of  protective  tariffs. 
The  tariff,  in  their  opinion,  was  of  no  benefit  to  them,  whereas 
it  favored  the  agriculturists  of  the  West  and  the  manufac- 
turers of  the  North.  The  national  policy,  however,  continued 
to  be  protectionist,  although  from  1833  to  1842  and  from 
1846  to  1861  duties  were  reduced  toward  a  revenue  basis.  In 
1861  the  Morrill  tariff  restored  duties  to  about  the  level 
of  1845,  but  increased  the  duties  on  iron  and  wool. 

1  In  1803  there  were  four  cotton  factories  in  the  country.  Five  years  later 
there  were  fifteen  mills,  with  eight  thousand  spindles.  By  1811  the  number 
of  spindles  had  increased  tenfold,  — to  eighty  thousand,  — and  in  1815  there 
were  five  hundred  thousand  spindles  in  operation.  The  home  consumption  of 
cotton  illustrates  the  same  development.  In  1800  American  manufacturers  con- 
sumed five  hundred  bales  of  cotton  ;  in  1815  they  used  ninety  thousand  bales. 


THE  "WAR  TARIFFS"  317 

When  the  Civil  War  broke  out,  the  government  was 
obliged  to  seize  upon  every  possible  source  of  revenue,  and 
duties  on  imports  were  naturally  made  to  furnish  their  share 
of  the  burden.  It  was  necessary,  moreover,  to  tax  foreign 
goods  heavily  in  order  not  to  place  at  a  disadvantage  those 
domestic  producers  whose  goods  were  now  heavily  taxed. 
Accordingly,  the  "  war  tariffs "  of  1862  and  1864  imposed 
duties  on  all  imports,  arid  effected  a  general  increase  of  the 
rates.  When  peace  was  established,  these  war  tariffs  were 
permitted  to  remain  practically  unchanged  for  nearly  twenty 
years,  although  the  internal  taxes  had  been  removed.  In 
1883  some  duties  were  lowered,  but  others  were  raised,  and 
the  general  character  of  the  tariff  was  not  altered.  In  1890 
the  McKinley  tariff  removed  the  revenue  duties  on  raw  sugar 
and  some  other  articles,  but  increased  the  protective  duties  on 
articles  that  competed  with  domestic  products.  Again  in 
1894  a  reverse  movement  took  place,  when  the  Wilson  tariff 
reduced  the  duties  on  most  protected  commodities,  reimposed 
a  revenue  duty  on  raw  sugar,  and  placed  wool,  copper,  and 
lumber  on  the  free  list.  Filially,  in  1897,  the  Dingley  tariff 
was  enacted.  This  act  increased  the  duty  on  most  goods,  al- 
though it  left  copper  on  the  free  list  and  reduced  the  duty 
on  steel  rails.  It  imposed,  on  the  average,  a  tax  of  about 
50  per  cent  of  the  value  of  goods  imported.1 

The  prevailing  tendency  among  Western  nations  thus  ap- 
pears to  be  decidedly  in  favor  of  protection.  In  economic 
theory,  however,  there  has  been  no  such  marked  protection- 
ist reaction  as  in  the  commercial  policy  of  many  nations. 
Indeed,  the  majority  of  economists  seem  to  have  remained 
faithful  to  the  classical  doctrines  on  this  subject.  Neverthe- 
less, the  German  economist  Friedrich  List,  in  his  "  National 
System  of  Political  Economy"  (1841),  and  the  American 

1  The  tariff  history  of  the  United  States  may  be  found  in  Taussig,  "  Tariff 
History  of  the  United  States";  Bolles,  "  Financial  History  of  the  United 
States";  Sumner,  "History  of  Protectionism  in  the  United  States";  and 
W.  M.  Daniels,  "The  Elements  of  Public  Finance." 


318  PRINCIPLES   OF  POLITICAL   ECONOMY 

economist  Henry  C.  Carey,  in  his  "  Principles  of  Social  Sci- 
ence "  (1856),  had  already  attacked  the  so-called  Manchester 
doctrine  at  the  very  time  that  this  doctrine  was  in  the  full  tide 
of  popularity.  The  violent  reaction  that  has  taken  place 
in  our  own  days  against  the  classical  school,  although  not 
directed  especially  against  this  point  of  its  system,  has  con- 
tributed none  the  less  to  shake  our  faith  in  the  absolute 
and  rigid  principles  of  classical  political  economy.  To-day, 
economists  of  the  realist  or  historical  school  insist  that  the 
commercial  policy  of  a  nation  must  be  suited  to  its  own  par- 
ticular conditions. 

VI.  The  Doctrine  of  Protection 

No  question  in  political  economy  has  stirred  up  more 
controversy,  caused  more  volumes  to  be  written,  or  even 
occasioned  more  warfare,  than  that  of  international  com- 
merce. Why  should  this  be  so  ?  Is  not  commerce  between 
nations  in  all  points  similar  to  trade  between  individuals? 
Is  it  not,  like  private  trade,  simply  an  ordinary  and  normal 
form  of  exchange,  and,  if  so,  why  do  we  need  a  special  the- 
ory of  international  trade?  If  exchange  is  in  itself  a  good 
thing,  how  can  there  be  anything  dangerous  in  the  purely 
accidental  circumstance  that  the  two  parties  to  the  transac- 
tion are  separated  by  a  national  boundary? 

We  have  already  learned  that  in  exchange  between  indi- 
viduals the  division  of  labor,  according  to  which,  for  example, 
one  man  produces  only  shoes  while  another  produces  only 
bread,  secures  for  both  participants  a  greater  sum  total  of 
satisfaction  and  comfort  than  would  be  available  if  each  were 
compelled  to  provide  himself  directly  with  bread  and  shoes. 
When  left  entirely  to  themselves,  people  exchange  goods 
because  it  is  profitable  for  them  to  do  so.  Free  traders  assert 
that  the  same  is  true  of  international  trade,  and  that  free 
exchange  between  nations  permits  us  to  obtain  some  goods 
at  the  cost  of  less  labor  and  capital  than  when  they  are  pro- 
duced at  home.  If,  for  example,  the  American  farmer  can 


THE   POPULAR   IDEA    OF   FOREIGN   EXCHANGE          319 

raise  100  bushels  of  wheat  by  100  days'  labor,  and  our  silk 
manufacturers  can  produce  25  yards  of  silk  in  120  days ;  if, 
on  the  other  hand,  in  France  25  yards  of  silk  require  only  90 
days'  work,  while  it  takes  115  days  to  raise  100  bushels  of 
wheat :  here  are  conditions  which  make  it  eminently  desirable 
for  French  silk  producers  and  American  wheat  producers  to 
exchange  their  goods.  For  if  international  exchange  were 
cut  off,  100  bushels  of  wheat  and  25  yards  of  silk  would 
cost  220  days'  labor  in  this  country  and  205  days'  labor  in 
France ;  but  by  producing  silk  for  both  countries,  the 
Frenchman  can  buy  more  wheat;  by  producing  wheat  for 
the  French  as  well  as  the  home  market  the  American  can 
buy  more  silk  for  a  given  amount  of  labor.1 

This,  at  all  events,  is  the  standpoint  of  the  classical  econo- 
mists. They  do  not  admit  or  conceive  that  international 
trade  can  be  governed  by  other  than  the  general  principles 
which  regulate  all  trade.  The  problem  of  foreign  commercial 
policy  is  no  problem  at  all.  Exchange,  they  declare,  is  a 
form  of  the  division  of  labor  (the  marvellous  effects  of  which 
have  already  been  explained).  Its  advantages  are  reciprocal, 
and  its  utility  is  absolutely  independent  of  the  question 
whether  or  not  those  who  engage  in  it  are  citizens  of  the 
same  or  of  different  countries. 

But  public  opinion  generally  does  not  profess  this  superb 
indifference.  It  admits  that  free  trade  may  be  preferable 
theoretically,  and  might  even  conduce  best  to  the  welfare  of 
humanity.  Nor  do  protectionists  pretend  to  be  enemies  of 
commerce  between  nations;  and  they  prove  this  abundantly 
by  their  efforts  to  increase  such  trade  and  the  sacrifices  which 
they  are  willing  to  make  in  order  to  establish  international 
routes  and  railways.  But  nations,  or  rather  the  men  that 
govern  them,  are  not  accustomed  to  speculate  on  the  interest 

1  Throughout  this  discussion  of  free  trade  and  protection  I  shall  endeavor 
so  far  as  possible  to  use  the  very  words  that  are  employed  by  partisans 
of  each  doctrine  —  quoting  free  traders  in  support  of  free  trade,  and  protec- 
tionists in  defence  of  protective  tariffs.  — C.  W.  A.  V. 


320  PRINCIPLES   OF   POLITICAL  ECONOMY 

and  welfare  of  humanity  in  general.  They  usually  limit 
themselves  to  caring  for  the  interests  of  the  particular  country 
in  which  they  live;  and  this  can  hardly  be  regarded  as  a 
criminal  offence.  They  contend,  —  rightly  or  wrongly,  for 
this  is  the  point  at  issue,  —  that  international  commerce,  when 
left  to  take  care  of  itself,  is  liable  to  ruin  the  industry  of  a 
nation,  to  restrict  or  even  to  stifle  its  productive  forces,  and 
indirectly  to  endanger  its  very  existence.  They  hold  that 
international  trade  does  not  confer  equal  and  reciprocal 
advantages  on  both  participants;  that  it  may  lead  to  the 
enrichment  of  one  nation  and  the  ruin  of  the  other.  There- 
fore it  behooves  a  nation  to  beware  that  it  shall  not  be  ex- 
ploited by  its  commercial  rivals. 

They  do  not  regard  international  trade  as  simply  a  form 
or  application  of  the  division  of  labor  and  of  solidarity,  but 
as  a  kind  of  warfare,  and  as  one  form  of  the  "  struggle  for 
life  "  among  nations.  Just  as  the  art  of  actual  war  consists 
in  invading  the  enemy's  territory  without  permitting  him  to 
invade  ours,  so  the  tactics  of  international  trade  should 
consist  in  inundating  foreign  countries  with  our  own  goods 
while  not  allowing  these  countries  to  export  their  goods  to 
our  shores.  To  accomplish  this  it  is  necessary  to  build  up 
home  industries  so  that  they  may  become  vigorous  enough 
to  keep  out  foreign  goods  and  even  to  compete  successfully 
with  them  in  foreign  markets.  This  has  been  the  object  of 
protectionism  for  many  years,  —  an  object  which  it  seeks 
to  attain  by  means  of  elaborate  tactics  based  mainly  on  the 
following  considerations  :  — 

(1)  As  international  trade  possesses  all  the  characteristics 
of  a  "  struggle  for  life  "  among  nations,  it  is  likely  to  produce 
all  the  unfortunate  effects  that  are  inherent  in  economic  war- 
fare and  competition,  —  even  competition  among  individuals, 
—  namely,  the  destruction  of  the  weak.  For  instance  : 
France,  Switzerland,  and  Japan,  because  of  cheaper  labor  and 
perhaps  because  of  better  natural  facilities,  can  produce  silk 
goods  cheaper  than  the  United  States  ;  therefore  the  unre- 


THE   EFFECTS    OF    FREE   TRADE  321 

stricted  importation  of  foreign  silks  would  destroy  this  branch 
of  American  industry,  which  now  produces,  annually,  more 
than  1100,000,000  worth  of  goods  and  employs  65,000  laborers 
receiving  annual  wages  of  nearly  121,000,000.  For  a  large 
number  of  other  American  industries  the  case  is  very  much 
the  same. 

Suppose,  now,  that  the  tariff  on  all  these  protected  prod- 
ucts be  removed.  Then  a  large  share  of  the  capital* and 
labor  now  employed  in  them,  including  the  65,000  laborers 
and  the  §81,000,000  of  capital  employed  in  silk  manufactures, 
would  become  unprofitable.  What,  in  such  an  event,  can  the 
silk  manufacturers  do  ?  They  cannot  turn  to  cotton  manu- 
facturing, because  England  produces  cotton  goods  cheaper 
than  we.  They  are,  moreover,  excluded  from  many  other 
productive  occupations  because  (under  a  system  of  absolute 
free  trade)  other  countries  are  our  superiors  in  these  branches. 
What,  then,  shall  they  do  ?  Will  it  be  necessary  for  most  of 
our  manufacturing  laborers,  representing  22  per  cent  of 
the  total  population,  to  leave  our  cities  and  take  to  farm- 
ing and  cattle-raising,  in  which  this  country  appears  to  be 
superior  to  other  nations  ?  We  say  "  appears,"  because  it  is 
by  no  means  certain  that  Russia  will  not  be  able  to  furnish 
the  world  with  cereals  cheaper  than  we,  when  her  methods 
of  production  and  her  means  of  transportation  have  been 
brought  up  to  date  ;  nor  is  it  at  all  certain  that  the  Argentine 
Republic  is  not  our  natural  superior  in  raising  cattle  and 
producing  meat  for  exportation. 

There  is,  however,  one  branch  of  production  in  which  our 
natural  advantages  seem  to  be  beyond  contest,  viz.,  that 
of  raising  raw  cotton.  Shall  the  manufacturers,  and,  in 
fact,  the  total  population  of  the  country,  therefore  migrate 
to  the  Southern  cotton  fields  because  cotton  is  the  only,  or 
almost  the  only,  pursuit  in  which  we  are  safe  from  ruinous 
foreign  competition  ?  Will  there  be  room  for  all  American 
labor  and  capital  in  this  single  branch  of  production?  Is 
it  not  obvious  that  under  these  circumstances  the  remunera- 


322  PRINCIPLES   OF   POLITICAL   ECONOMY 

tion  for  capital  and  labor,  —  if,  indeed,  for  a  great  part  of 
it  there  would  be  any  remuneration  at  all,  —  would  be  ridicu- 
lously small,  especially  in  view  of  the  facts  that  the  law  of 
diminishing  returns  operates  in  this  branch  of  production, 
and  that  the  capital  and  labor  now  applied  to  cotton-raising 
already  provide  three-fourths  of  the  world's  demand  for  raw 
cotton  ? 

Should  any  country  prove  inferior  to  others  in  all  branches 
of  production,  that  country  would  be  dislodged  from  one 
occupation  after  another,  and  its  only  ultimate  resource 
would  be  to  transport  its  population  and  whatever  capital 
it  had  left,  to  those  countries  which  had  triumphed  over 
it  in  the  competitive  struggle.1  Only  thus  could  it  profit 
by  the  conditions  which  assure  the  economic  superiority  of 
rival  nations.  In  other  words,  if  we  can  no  longer  bear 
foreign  competition  our  only  resource  is  to  emigrate  to  foreign 
countries,  —  to  Russia,  or  to  South  America,  or  to  England  ! 
This,  protectionists  contend,  is  the  logical  outcome  of  a  system 
that  regards  international  trade  simply  as  the  method  of 
economic  organization  best  suited  to  getting  the  most  out  of 
the  earth  and  its  inhabitants,  without  reference  to  the  fact 
that  these  inhabitants  are  divided  into  nations,  and  that  each 
nation  has  the  determination  and  the  right  to  live  and  to 
prosper. 

It  is  comprehensible,  —  protectionists  continue,  —  that  in 
the  case  of  human  beings  an  out-and-out  Darwinist  might 
willingly  sacrifice  individuals  to  the  interest  of  the  race  or  the 
species.  But  we  cannot  expect  a  nation  to  permit  its  own 
destruction  for  the  sake  of  mankind  as  a  whole.  To  expect 

1  This  is  what  takes  place  in  the  case  of  commerce  among  various  parts  of 
the  same  country.  Many  counties  in  the  United  States  have  decreased  in 
population  between  1890  and  1900,  despite  the  rapid  growth  of  the  total 
population.  There  is  a  strong  tendency,  moreover,  toward  the  localization  of 
certain  branches  of  production  in  certain  clearly  defined  districts.  Interesting 
data  regarding  these  phenomena  are  given  by  the  Twelfth  Census.  But  as 
these  changes  take  place  within  the  nation,  and  one  part  gains  what  the  other 
loses,  there  is  no  need  for  governmental  intervention. 


NATIONAL   INTERESTS  323 

this  is  all  the  more  absurd  when  we  bear  in  mind  that  the 
problem  of  international  trade  is  fundamentally  only  a 
question  of  economic  and  commercial  supremacy.  The  part 
played  by  the  nations  of  the  earth,  however,  is  by  no  means 
confined  to  that  of  economic  productivity.  Shall  we  incur 
the  risk  of  perhaps  eliminating  a  new  Greece  from  among 
the  nations  of  the  world  simply  because  her  arid  soil  may 
not  enable  her  to  produce  goods  as  cheaply  as  her  rivals  ? 

(2)  Let  it  be  granted  that  in  the  struggle  for  supremacy 
no  nation  would  succumb  entirely,  and  that  each  nation  would 
succeed  in  finding  some  branch  of  production  in  which  it 
could  retain  its  superiority,  and  to  which  all  its  productive 
energies  would  be  devoted.  Could  this  be  called  a  desirable 
state  of  affairs  ?  The  free  trade  school  replies  affirmatively, 
because  it  considers  this  result  as  a  vast  application  of  the 
division  of  labor.  Free  traders  delight  in  regarding  the 
universe  as  an  immense  work-shop  in  which  each  nation  pro- 
duces but  one  kind  of  goods,  namely,  those  which  it  can  by 
nature  produce  best  and  most  easily ;  they  contend  that  such 
a  system  would  effect  the  completest  utilization  of  the  pro- 
ductive forces  of  our  planet  and  of  humanity.  Thus  France 
would  produce  only  fine  wines  and  objects  of  art,  England 
would  make  textiles,  China  would  raise  only  raw  silk  and  tea, 
Japan  would  raise  rice  and  raw  silk,  Australia  would  devote 
her  productive  energy  to  wool,  Switzerland  to  silk  goods, 
Russia  to  wheat,  Spain  to  olives  and  fruit,  Belgium  to  fire- 
arms, Scandinavia  to  dairy  products,  Brazil  to  coffee,  Canada 
to  lumber,  Austria-Hungary  to  leather  goods,  and  the  United 
States  to  raw  cotton. 

But  in  this  case  the  national  interest  is  entirely  sacrificed 
to  a  supposed  "  general "  interest  which  is  purely  an  abstrac- 
tion. Such  an  ideal  as  this,  —  admitting  that  it  could  be 
realized,  —  would  involve  the  degradation  of  all  nations  and 
consequently  that  of  the  whole  human  race.  It  has  been 
found  that  for  individuals  specialization  in  a  single  kind  of 
work  is  liable  to  prove  disastrous  to  physical,  intellectual, 


324  PRINCIPLES   OF   POLITICAL   ECONOMY 

and  moral  development.  What,  then,  would  be  its  effects 
for  a  whole  nation  ?  A  country  in  which  all  persons  were 
engaged  in  the  same  occupation  would  be  nothing  more  than 
an  amorphous  mass,  a  monstrous  thing  without  intelligence 
and  without  vitality.  Biology  teaches  that  the  development 
of  an  organism  and  its  rank  in  the  scale  of  life  are  directly 
determined  by  the  variety  and  number  of  its  functions  and 
the  differentiation  of  the  organs  that  perform  these  functions. 
Exactly  the  same  is  true  of  a  nation.  If  it  would  seek  to  rise 
to  the  level  of  a  high  and  genuine  civilization,  it  must  en- 
deavor to  encourage  all  forms  of  social  activity,  all  manifesta- 
tions of  national  energy,  and  it  must  therefore  take  care  that 
foreign  competition  does  not  destroy  them  one  after  the 
other. 

(3)  The  importation  of  foreign  products,  if  not  counter- 
balanced by  a  corresponding  exportation  of  our  own  products, 
is  likely  to  ruin  a  country  by  removing  its  money  and  reducing 
it  to  the  position  of  a  debtor  nation.  The  importing  nation 
will  pay  with  money  so  long  as  it  possesses  any,  whereupon 
it  will  be  compelled  to  borrow  the  money  required  to  pay  for 
its  purchases  abroad.  Indeed,  this  money  may  be  borrowed 
from  the  very  nations  to  which  it  must  be  paid  ;  in  which 
case  the  situation  becomes  worse  than  before,  because  there  is 
thus  added  to  the  debt  incurred  by  imports  the  debt  made  by 
borrowing  money  and  the  necessity  for  paying  interest  on  it. 
A  country  may  in  this  manner  be  steadily  and  surely  hastened 
toward  bankruptcy.  Such,  for  example,  has  been  the  experi- 
ence of  Portugal  and  Turkey.1 

Political  economy,  it  is  true,  teaches  that  imports  sooner 

1  This  was  the  sense  in  which  Cato  declared  :  Patrem  familias  vendavem, 
non  emacem  esse  oportet.  ("  De  Agricultural')  The  Mosaic  law  says :  "  Ob- 
serve to  do  all  the  commandments  which  I  command  thee  to-day.  .  .  .  thou 
shalt  lend  unto  many  nations,  but  thou  shalt  not  borrow ;  and  thou  shalt 
reign  over  many  nations,  but  they  shall  not  reign-  over  thee."  (Deuteronomy 
xv.  6.)  This  command,  to  be  sure,  refers  to  loans  and  not  to  sales  ;  but 
these  are  ultimately  the  same,  inasmuch  as  a  purchasing  nation  in  the  long 
run  always  becomes  a  debtor  nation. 


AMERICAN   ARGUMENTS   FOR   PROTECTION  325 

or  later  give  rise  to  exports.  But  this  law  —  admitting  its 
validity  as  clearly  established  —  is  not  sufficient  to  reassure 
protectionists.  In  fact,  our  explanation  (page  299)  demon- 
strated that  although  imports  inevitably  lead  to  exports,  they 
do  this  by  effecting  a  rise  in  the  rate  of  exchange,  an  outflow 
of  metallic  money,  and  a  general  fall  in  prices.  All  these 
effects  are  very  detrimental  to  a  nation.  They  are,  moreover, 
singularly  aggravated  when  a  nation,  in  order  to  meet  its 
obligations,  has  recourse  to  loans. 

(4)  Protectionists  advance  the  fiscal  argument  that  cus- 
toms duties  are  the  best  kind  of  taxes,  because  they  are 
paid  by  foreign  countries.  A  nation  should  therefore  not 
hesitate  to  impose  them,  since  they  are  advantageous  not 
only  as  protecting  home  industries,  but  also  as  procuring 
resources  without  any  cost  to  the  citizens  of  a  nation. 

The  above  arguments  in  favor  of  protection  may  be  regarded 
as  typical ;  we  encounter  them  in  one  form  or  another  in  every 
country  where  the  problem  of  a  commercial  policy  has  given 
rise  to  controversy.  Nowhere,  however,  has  the  problem  of 
international  trade  been  discussed  more  persistently  than  in 
the  United  States.  Here  it  has  been  for  many  years  in  the 
foreground  of  political  discussion  and  has  received  an  amount 
of  public  attention  beyond  all  proportion  to  its  real  and  relative 
importance.  Innumerable  theories,  some  absurdly  naive  and 
others  bewilderingly  elaborate,  have  been  advanced  in  this 
country  in  defence  of  "protection"  or  of  "free  trade." 

While  it  is  of  course  entirely  beyond  the  scope  of  this  vol- 
ume to  attempt  anything  like  an  exhaustive  discussion  of 
the  problems  involved,  it  may  not  be  amiss,  before  termi- 
nating this  section,  to  give  a.  brief  statement  of  some  of  the 
theories  that  are  most  frequently  employed  in  the  United 
States  in  defence  of  protection. 

It  is  often  claimed  that  a  restrictive  policy  is  a  wise  economy 
of  the  labor  of  the  people.  "  The  national  economy  of  labor," 
says  R.  E.  Thompson,  "  consists  not  in  getting  on  with  as 
little  as  possible  of  it,  but  in  finding  remunerative  employment 


326  PRINCIPLES   OF   POLITICAL   ECONOMY 

for  as  much  of  it  as  possible.  If  labor  be  the  source  of  wealth, 
then  that  country  must  advance  to  wealth  which  has  work 
for  all  who  are  willing  and  able  to  do  it." l  The  greater  the 
variety  of  industries,  the  more  the  demand  for  labor  and  the 
better  the  labor  is  paid  ;  for  instead  of  two  workmen  com- 
peting for  every  job,  we  shall  have  two  masters,  two  sorts  of 
masters,  running  after  every  workman.  The  creation  of  a 
diversified  industry,  furthermore,  introduces  such  a  change 
into  farming  itself  as  enables  the  farmer  to  employ  a  greater 
variety  of  labor.  A  home  market  takes  the  place  of  the  dis- 
tant one,  and  crops  are  grown  which  require  more  care  and 
attention,  but  which  bring  larger  profits.  Farming  passes 
out  of  its  wasteful  extensive  phase  into  the  intensive  stage,  in 
which  its  operations  are  more  productive  and  profitable. 

The  natural  drift  and  bent  of  the  American  character  toward 
the  mechanic  arts  and  the  inventions  that  facilitate  them, 
would,  in  the  absence  or  the  undue  subordination  of  the 
manufacturing  industries,  find  little  or  no  vent;  the  strongest 
side  of  the  national  intellect  and  the  brightest  gifts  of  the 
people  would  have  no  opportunities  for  development. 

Protection  to  industry  is  as  much  needed  by  the  farmer  as 
by  the  manufacturer.  Just  as  the  laborer's  prosperity  is 
measured  by  the  relation  of  his  wages  to  current  prices,  and 
not  by  the  latter  alone,  so  the  farmer's  is  measured  by  the 
relation  of  the  price  of  raw  materials  to  the  price  of  manu- 
factured goods,  —  including  food  under  the  former,  —  and 
not  by  the  price  of  either  one  alone.  Wherever  the  manu- 
facturer is  found  at  work,  the  prices  of  the  two  converge; 
wherever  he  is  found  wanting,  and  the  farmer  stands  alone, 
their  prices  diverge.  When,  in  accordance  with  the  classi- 
cal or  cosmopolitan  theory,  some  nations  produce  almost 
exclusively  raw  materials,  and  exchange  them  for  manu- 
factured goods  from  abroad,  one  side  pays  for  the  trans- 
portation of  bulky  articles  over  great  distances,  while  the 
other  pays  for  the  transfer  of  goods  of  the  same  value  but 
1  R.  E.  Thompson,  "  Political  Economy"  (Philadelphia). 


AMERICAN   ARGUMENTS   FOR   PROTECTION  327 

more  compact  form.  The  producer  of  food  and  of  raw  mate- 
rials has  to  bear  the  heaviest  burden  of  this  sort,  namely, 
the  cost  of  transportation  for  bulky  commodities. 

Protection  to  industry  gives  the  farmer  a  near,  abundant 
and  steady  market  for  his  breadstuffs,  and  creates  a  market 
for  crops  more  remunerative  than  grain.  The  principal 
European  market  for  our  wheat  and  corn  is  furnished  by 
England  and  is  the  most  unsteady  market  that  can  be 
thought  of. 

Whatever  policy  increases  the  number  of  those  that  are  not 
engaged  in  farming,  but  must  live  on  its  products  and  pay  for 
them,  is  the  one  which  secures  to  the  farmer  the  best  and 
steadiest  remuneration.  The  creation  of  a  varied  industry, 
moreover,  enables  the  farmer  to  enrich  himself  without  im- 
poverishing the  soil,  whereas  his  dependence  on  foreign 
markets  leads  him  to  produce  crops  that  exhaust  the  soil  and 
that  reduce  his  farm  to  a  wheat  factory  or  a  corn  factory.  A 
variety  of  industries  brings  the  farmer  and  the  artisan  close 
together  and  gives  the  former  facilities  for  making  returns 
to  the  soil  that  he  would  not  otherwise  enjoy.  It  makes  it 
worth  while  to  farm  more  carefully,  through  the  certainty  of  a 
permanent  local  market.  Protection,  furthermore,  diminishes 
the  risk  of  farming  by  giving  variety  to  its  products.  The 
farmer  who  depends  on  exportation  puts,  so  to  speak,  "  all 
his  eggs  in  one  basket "  ;  but  when  the  consumer  is  close 
at  hand,  he  can  raise  and  sell  a  variety  of  crops.  If  some  of 
these  crops  fail,  others  are  likely  to  succeed. 

By  bringing  the  producer  and  the  consumer  near  to  each 
other,  the  restrictive  policy  diminishes  their  need  of  the  trader, 
and  weakens  his  power  over  them.  The  heavy  tax  of  transpor- 
tation is  saved ;  men  are  set  free  from  that  most  laborious  and 
unproductive  occupation  to  engage  in  others  which  are  pro- 
ductive, and  which  this  very  policy  has  called  into  existence. 

The  protectionist  regards  domestic  trade  always  as  more 
profitable  than  foreign  trade.  He  maintains  that  it  is  more 
desirable  to  employ  American  capital  in  producing  some  of 


328  PRINCIPLES    OP    POLITICAL   ECONOMY 

the  goods  which  we  usually  import,  than  to  employ  it  in  pur- 
chasing these  goods  from  abroad.  Therefore,  he  argues,  we 
must  remove  the  obstacles  in  the  way  of  making  manufac- 
tures at  home  profitable.  A  protective  tariff  does  this,  and 
is  often  the  only  way  to  create  a  varied  industry  in  a  new 
or  poor  country  that  could  not  otherwise  possess  it.  John 
Stuart  Mill,  although  he  was  one  of  the  most  ardent  disci- 
ples of  free  trade,  admitted  that  the  superiority  of  one  country 
over  another  in  a  particular  branch  of  industry  often  arises 
from  having  begun  it  earlier.  "  A  country,"  says  Mill,  "  which 
has  skill  and  experience  to  acquire,  may  in  other  respects  be 
better  adapted  to  the  production  than  those  earlier  in  the 
field;  and,  besides,  it  is  a  just  remark  that  nothing  has  a 
greater  tendency  to  produce  improvement  in  any  branch  of 
production  than  its  trial  under  a  new  set  of  conditions.  But 
it  cannot  be  expected  that  individuals  should  at  their  own 
risk,  or  rather  to  their  certain  loss,  introduce  a  new  manu- 
facture and  bear  the  burthen  of  carrying  it  on  until  the  pro- 
ducers have  been  educated  up  to  the  level  of  those  with  whom 
the  processes  have  become  traditional.  A  protecting  duty 
continued  for  a  reasonable  time  will  sometimes  be  the  least 
inconvenient  mode  in  which  a  country  can  tax  itself  for  the 
support  of  such  an  experiment." 

Protectionists  go  so  far  as  to  assert  that  the  competition  of 
home  producers  in  the  protected  industry  soon  reduces  prices 
to  a  point  that  is  not  above  the  ordinary  level  of  profits  in 
other  industries.  Protection,  they  hold,  simply  overcomes 
the  obstacles  to  cheap  production,  namely :  the  risk  of  en- 
gaging capital  in  large  undertakings  for  which  the  home 
market  is  not  secured ;  the  inexperience  of  the  laboring 
classes,  whose  industrial  education  is  an  investment  that  pays 
only  in  the  long  run ;  and  the  delay  that  is  required  to 
organize  an  industry  and  accumulate  the  capital  that  makes 
it  possible  to  produce  on  a  large  scale.1 

1  A  good  discussion  of  this  point  from  the  point  of  view  of  a  free  trader  is 
given  in  Cairnes1  "Some  Leading  Principles  of  Political  Economy." 


AMERICAN   ARGUMENTS   FOR    PROTECTION  329 

One  eminent  American  economist,  Professor  S.  N.  Patten, 
has  applied  considerable  ingenuity  to  the  defence  of  pro- 
tection. He  distinguishes  what  he  calls  "  static  "  societies 
from  "dynamic"  societies,  and  regards  the  United  States  as 
the  type  of  a  "  dynamic  "  society.  Our  ideal,  he  maintains, 
must  stand  in  sharp  contrast  with  the  static  ideal  advocated 
by  most  free  traders.  "  The  older  theories  of  economics  have 
always  pushed  to  the  front  the  conception  of  a  static  society, 
in  which  all  the  various  elements  would  harmonize  and  thus 
form  the  highest  state  of  civilization.  The  ideal  I  wish  to 
emphasize,  on  the  contrary,  is  based  on  the  changing  dynamic 
conditions  which  are  necessary  for  any  people  to  pass  through 
in  its  progress  toward  the  highest  possible  social  state. 
Whether  we  shall  have  a  static  or  dynamic  society  is  really 
the  centre  of  the  discussion  about  the  tariff." 

"  The  American  people  are  in  a  dynamic  state.  There  is 
at  the  present  time  a  constant  growth  of  population,  and 
hence  an  increased  number  of  laborers  must  find  employment 
in  some  way.  We  must  therefore  continually  seek  for  new 
opportunities  for  labor  in  which  this  increase  of  population 
can  find  employment.  .  .  .  The  American  people  should  be 
more  progressive  than  those  of  Europe.  The  soil  we  occupy 
is  newer  than  that  of  Europe,  the  mines  of  which  we  make  use 
are  superior,  and  these  conditions,  coupled  with  the  spirit  of 
activity  which  fills  the  American  people,  should  push  us  along 
into  a  higher  stage  of  civilization  much  more  rapidly  that  it 
is  possible  for  the  people  of  older  civilizations  to  advance." 

Professor  Patten  does  not  believe  that  there  is  but  one 
theory  6f  political  economy,  the  doctrines  of  which  hold  true 
for  every  civilization.  The  same  forces,  probably,  are  at 
work  everywhere,  but  their  relative  importance  varies-  with 
the  industrial  condition  of  each  people.  It  is  therefore  quite 
possible  that  the  best  economic  policy  for  America  may  be 
very  different  from  that  of  other  nations. 

"  The  world's  progress  is  now  dependent  upon  the  develop- 
ment of  internal  resources,  and  not  of  external  trade.  We 


330  PRINCIPLES    OF    POLITICAL    ECONOMY 

need  a  systematic  development  of  all  those  opportunities  for 
labor  with  which  each  country  has  been  endowed  by  nature. 
We  must  make  a  better  use  of  all  our  natural  resources  if  the 
world  is  to  advance  to  a  higher  industrial  state.  Progress 
must  come  from  the  development  of  large  continental  nations, 
rich  in  natural  resources.  Small  nations,  deficient  in  many  of 
those  natural  resources  needed  for  a  nation's  development, 
must  rely  largely  upon  trade  to  obtain  those  things  in  which 
their  resources  are  deficient.  To  such  a  nation  the  profits  of 
trade  can  to  a  large  degree  be  accepted  as  the  criterion  of 
national  prosperity  ;  but  large  continental  nations  must  look 
nearer  the  real  source  of  national  prosperity  to  obtain  their 
criterions.  They  must  become  successful  by  the  development 
of  their  natural  resources.  Their  land  and  their  mines  must 
be  opened  up  and  the  productive  capacity  of  each  laborer 
must  be  increased." 

In  answer  to  his  own  query,  Shall  the  ideal  of  American 
civilization  be  national  or  cosmopolitan?  Professor  Patten 
declares  that  "  nationalism  is  a  dynamic  movement,  and  seeks 
to  bring  each  nation  through  a  series  of  changes  and  develop- 
ments that  would  bring  a  better  harmony  between  its  social 
conditions  and  its  economic  environment.  It  assumes  that 
each  nationality  through  differences  of  climate,  soil,  and  other 
natural  conditions  has  an  economic  environment  peculiar  to 
itself  to  which  a  particular  type  of  man  is  best  adjusted,  and 
that  a  series  of  nations  of  different  types,  each  fitted  to  its 
own  environment,  will  make  a  better  use  of  the  world  and 
reach  a  higher  civilization  as  a  whole  than  any  one  type  could 
if  it  endeavored  to  occupy  the  whole  world  and  retain  the 
common  characteristics.  .  .  .  Adjust  the  people  of  each 
nation  to  its  own  environment  and  mankind  will  be  better 
adjusted  to  natural  conditions  of  the  whole  world  than  in  any 
other  way."  1 

1  S.  N.  Patten,  "  The  Economic  Basis  of  Protection  "  (Philadelphia,  1890). 


THE   ARGUMENT   FOR   TUTELARY   PROTECTION         331 

VII.    The  Doctrine  of  Free  Trade 

Free  traders  usually  begin  by  refuting  the  arguments  just 
enumerated. 

The  argument  drawn  from  the  dangers  of  free  competition, 
they  admit,  produces  a  great  impression.  But,  observe  the 
free  traders,  note  what  singular  changes  this  argument  has 
undergone,  and  to  what  contradictions  it  leads !  Formerly 
it  was  maintained  that  the  weak  must  be  protected  against 
the  strong,  the  young  countries  against  the  old.  Thompson, 
for  instance,  declared  that  protection  aims  to  overcome  the 
initial  obstacles  in  the  way  of  founding  new  and  diversified 
industries.  This  was  known  as  tutelary  protection,  designed 
to  educate  labor  and  capital  in  hitherto  untried  occupations, 
and  in  the  United  States  was  known  as  "  protection  to  infant 
industries."  It  was  remarked  that  young  industries  have  to 
contend  with  great  disadvantages,  —  that  it  is  not  easy  for 
them  to  withstand  the  competition  of  enterprises  already 
in  possession  of  vast  markets,  and  therefore  enabled  by  reason 
of  extensive  production  to  carry  the  division  of  labor  and 
large-scale  methods  to  the  highest  degree  of  perfection.  The 
struggle  is  all  the  more  difficult  for  the  reason  that  in  new 
countries  wages  are  high  and  capital  is  relatively  scarce. 
It  is  well  known  that  young  trees  cannot  easily  be  made  to 
grow  in  close  proximity  to  old  ones,  because  the  latter,  hav- 
ing already  taken  all  the  light  from  above  as  well  as  all  the 
nutriment  of  the  soil,  leave  but  little  room  for  the  others  to 
take  root  or  to  stretch  out  their  branches. 

The  argument  seemed  plausible.  It  seemed  to  be  borne 
out  by  the  experience  of  new  countries,  such  as  Australia 
and  Canada,  which,  although  educated  in  the  school  of  pure 
free  trade,  did  not  hesitate  to  raise  up  protective  barriers 
against  other  countries,  —  even  against  England. 

The  favorite  example  for  protectionists  the  world  over  is 
the  United  States.  Would  American  industries  have  grown  so 
rapidly  if  they  had  been  obliged  in  the  beginning  to  struggle 


832  PRINCIPLES    OF   POLITICAL    ECONOMY 

unaided  against  English  manufactures?  Would  they  not 
at  the  very  outset  have  been  driven  from  the  field?  Per- 
haps so.1  But  the  United  States  has  brilliantly  accomplished 
its  economic  evolution  in  this  respect,  and  now  ranks  among 
the  greatest  manufacturing  nations  of  the  earth.  And  now 
that  the  nation  is  strong  industrially,  and  its  "  infant  indus- 
tries "  have  been  fostered  to  maturity,  has  it  torn  down  the 
protective  barrier  which  sheltered  them  in  their  infancy  ? 
By  no  means  !  Mr.  David  A.  Wells  declares  expressly  that 
"  there  has  never  been  an  instance  in  the  history  of  the  coun- 
try where  the  representatives  of  such  [infant]  industries, 
who  have  enjoyed  protection  for  a  long  series  of  years,  have 
been  willing  to  submit  to  a  reduction  of  the  tariff,  or  have 
proposed  it.  But  on  the  contrary,  their  demands  for  still 
higher  and  higher  duties  are  insatiable  and  never  inter- 
mitted." Americans  continue  the  protectionist  policy,  and 
at  the  same  time  abandon  the  infant  industry  argument  as 
unworthy  of  a  great  industrial  nation.  By  an  inverse  argu- 
ment they  now  declare  that  a  nation  that  is  advanced  in 
civilization,  that  is  wealthy  and  in  the  habit  of  paying  high 
wages  to  its  laborers,  must  be  protected  against  nations  pos- 
sessing a  retrograde  civilization  and  paying  low  wages  for 
labor.2 

"  Protection,"  says  Professor  Patten,  in  so  many  words, 

1  According  to  free-trade  authorities,  principally  Professor  F.  W.  Taussig, 
the  low  duties  prevailing  during  the  thirty  years  before  the  Civil  War  (the 
so-called  " era  of  free  trade")  do  not  seem  to  have  checked  the  growth  of 
manufactures.     "  In  general,"  says  Professor  Taussig,  "  the  extent  to  which 
mechanical  branches  of  production  have  been  brought  into  existence  and 
maintained  by  the  protective  system  is  greatly  exaggerated  by  its  advocates  ; 
and  even  the  character  and  direction  of  their  development  have  been  influenced 
less  than,  on  grounds  of  general  reasoning,  might  have  been  expected. 

2  American  economists  point  out  that  just  as  Europe  and  Asia  lower  the 
American  standard  of  civilization  and  living  by  sending  their  poor  and  fam- 
ished emigrants  to  the  United  States,  so  also  they  are  working  toward  the 
same  result  by  sending  us  their  cheap  products.      Both  our  higher  civiliza- 
tion and  our  higher  wages  must  be  defended  against  the  invasion  of  cheap 
labor  and  the  importation  of  goods  produced  by  cheap  labor. 


WHO   NEEDS  PROTECTION?  333 

"  now  changes  from  a  temporary  expedient  to  gain  specific 
ends  to  a  consistent  endeavor  to  keep  society  dynamic  and 
progressive."  Or,  in  the  words  of  another  well-known  pro- 
tectionist writer,  "the  products  of  America  do  not  need 
protection  against  those  of  England  because  our  industries 
are  younger,  but  because  they  are  made  under  a  higher 
civilization." 

Meanwhile,  the  nations  of  Europe  declare  that  a  high  tariff 
barrier  is  indispensable  to  them  precisely  because  they  are 
old  and  require  protection  against  the  dangerous  competition 
of  new  countries  possessing  the  advantages  of  a  cheap  virgin 
soil  and  low  taxes. 

Hence,  free  traders  ask  :  What  conclusion  must  be  drawn 
from  this  varied  application  of  the  protectionist  argument? 
To  whom  is  protection  really  necessary  ?  Do  the  weak  need 
it^gainst  the  strong,  or  the  strong  against  the  weak  ?  Do 
new  countries  require  it  against  old  ones,  or  the  old  against 
the  new  ?  What  are  we  to  think  of  an  argument  that  is 
made  to  serve  equally  well  for  the  defence  of  two  exactly 
opposite  doctrines  ? 

Free  traders  regard  the  fear  that  a  nation  could  ever  be 
depopulated  by  international  commerce  as  vain  and  absurd. 
The  awful  protectionist  picture2  of  a  nation  dislodged  by 
foreign  competition  from  all  the  branches  of  production  suc- 
cessively, —  a  nation  reduced  to  the  necessity  of  letting  its 
soil  lie  fallow,  and  seeking  an  asylum  within  the  boundaries 
of  a  successful  competitor,  —  they  consider  unutterably  fan- 
tastic. No  country,  however  unfortunate,  is  likely  to  be 
inferior  to  others  in  all  the  branches  of  production.  And  if 
such  a  case  should  ever  occur,  if  ever  a  nation  were  so 
harshly  treated  by  fate  or  by  nature  as  to  be  forced  to  work 
harder  on  its  own  land  in  order  to  live,  than  anywhere  else, 
certainly  the  prohibition  of  foreign  imports  would  not  make 
it  any  richer  or  happier.  In  such  a  case  as  this,  laborers  and 
capitalists  would  soon  discover  the  path  that  leads  to  better 

1  George  Gunton,  "  Social  Economics,"  page  338.  2  See  page  322. 


334  PRINCIPLES   OF   POLITICAL   ECONOMY 

countries  ;  and  to  prevent  them  from  taking  it  would  require, 
not  a  barrier  of  duties  on  imports,  but  a  prison  wall. 

It  is  forgotten,  moreover,  in  this  argument,  that  inter- 
national commerce  tends  always  to  take  the  form  of  barter. 
Every  importation  occasions  a  counter-current  of  exporta- 
tion ;  for  how  can  a  nation  be  supposed  to  buy  abroad  with- 
out giving  anything  in  exchange,  —  unless  we  assume  that 
foreign  nations  will  furnish  their  products  gratuitously,  in 
which  case  the  situation  of  the  importing  nation  would  be 
more  enviable  than  pitiable,  and  such  a  process  as  this  could 
not  possibly  ruin  it.  If,  in  reality,  any  nation  is  too  poor  to 
send  goods  abroad,  we  may  be  perfectly  sure  that  foreign 
countries  will  take  care  not  to  export  anything  to  it. 

When  protectionists  claim  that  the  possession  of  a  large 
quantity  of  money  is  a  great  advantage,  and  that  protective 
tariffs,  by  discouraging  imports,  tend  to  create  a  favorable 
"  balaijce  of  trade,"  they  overlook  the  fundamental  nature  of 
international  trade.  To  be  sure,  there  are  periods  when  a 
nation  may  sell  more  than  it  buys  abroad,  and  will  therefore 
collect  a  balance  in  money.  But  the  accumulation  of  money 
in  one  country  and  its  withdrawal  from  another  will  cause 
high  prices  to  prevail  in  the  former  country  and  low  prices  in 
the  latter.  The  former  country  thus  becomes  a  good  market 
in  which  to  sell,  and  a  bad  market  in  which  to  buy ;  people 
will  ship  more  goods  than  they  would  if  the  high  prices  did 
not  prevail,  and  will  take  fewer  goods  from  it ;  they  will 
withdraw  gold  from  the  place  where  prices  are  high,  for  use 
in  the  place  where  prices  are  low.  The  experience  of  four 
centuries  has  demonstrated  the  futility  of  trying  to  interfere 
with  this  movement  of  specie.  On  the  other  hand,  the  same 
forces  make  it  impossible  or  improbable  that  a  nation  will 
ever  be  drained  of  its  metallic  money  by  international  trade.1 

1  We  have  already  explained  why  this  is  so.  Even  in  the  case  of  the 
South  American  Republics  the  cause  for  the  scarcity  of  metallic  money  must 
be  sought  in  the  abuse  of  the  credit  system  and  issues  of  paper  money,  rather 
than  in  foreign  imports. 


WHO   PAYS   THE   DUTY?  335 

It  is  absurd,  moreover,  to  pretend  as  a  general  doctrine 
that  protective  tariffs  are  paid  by  foreign  nations,  and  that 
they  mean  an  increase  of  the  public  revenue  without  consti- 
tuting a  burden  on  the  nation  which  imposes  them.1  How 
exceedingly  convenient  it  would  be  if  a  nation  could  provide 
itself  with  a  revenue  simply  by  taking  money,  as  it  were, 
from  the  pockets  of  foreign  exporters !  Supposing  that  a 
government  really  possessed  this  remarkable  power,  is  there 
not  every  reason  to  believe  that  it  would  not  long  remain  a 
secret  confined  to  one  nation  ?  Would  not  all  nations  hasten 
to  adopt  this  excellent  means  of  providing  a  revenue  by 
shifting  the  burden  of  taxation  to  the  shoulders  of  foreign 
competitors?  Thus,  when  all  nations  had  adopted  protec- 
tive duties  as  devices  for  taxing  foreign  countries,  none 
would  be  better  off  than  another,  and  their  relative  positions 
would  be  the  same  as  before. 

It  is  true  that  under  exceptional  circumstances  the  burden 
of  customs  duties  may  really  be  borne  by  foreign  exporters.2 
But  as  a  general  rule,  and  by  virtue  of  what  is  known  as  the 
shifting  of  taxation,  every  tax  paid  by  a  producer  or  by  a  mer- 
chant is  ordinarily  transferred  to  the  purchaser  of  the  taxed 
goods  and  is  ultimately  paid  by  the  consumer.  This  shifting 
of  the  burden  from  producer  to  consumer  is  even  more  likely 
to  be  effected  in  the  case  of  foreign  than  of  native  products. 

1  See  page  325. 

2  This  case  was  pointed  out  by  John  Stuart  Mill.     Every  rise  in  prices  en- 
tails a  reduction  of  consumption.     If  the  article  in  question  is  a  foreign  prod- 
uct, the  foreign  producer  will  be  compelled  to  consider  whether  it  would  not 
be  advisable  to  make  a  sacrifice  of  part  of  his  profits  and  reduce  the  price  of 
his  goods  to  the  extent  of  the  tariff,  in  order  to  retain  all  his  customers  by 
permitting  them  thus  to  buy  the  goods  at  the  former  price.    It  is  evident  that 
if  the  price  is  increased,  many  former  purchasers  will  not  continue  to  buy. 
Hence  the  producer  must  face  the  alternative  of  decreasing  his  sales  or  reduc- 
ing his  prices  to  the  extent  of  all  or  part  of  the  duty.     All  things  consid- 
ered, it  is  not  unlikely  that  in  some  cases  his  interest  will  lead  him  to  choose 
the  second  alternative.    But  in  order  that  foreign  producers  shall  submit  to 
this  burden,  two  conditions  are  requisite  :  (a)  the  cost  of  production  must 
be  low  enough  to  permit  a  reduction  in  the  price  received  by  producers ; 
(6)  producers  must  be  unable  to  dispose  of  their  goods  in  other  markets. 


336  PRINCIPLES   OF   POLITICAL   ECONOMY 

But  let  us  for  a  moment  admit  the  entire  validity  of  the 
protectionist  argument  that  protective  duties  are  really 
borne  by  the  foreign  producer  and  exporter.  What  will  be 
the  result  ?  Evidently,  the  price  of  the  imported  goods  will 
not  be  changed,  inasmuch  as  the  duty  is  paid  by  the  pro- 
ducer, and  not  added  to  the  price  which  must  be  paid  by  the 
consumer.  Consequently,  the  competition  of  foreign  goods, 
and  the  discouraging  influence  of  this  competition  on  home 
industry,  will  in  no  wise  be  diminished.  Therefore,  home 
industries  will  attain  none  of  the  objects  for  which  protection 
was  considered  desirable ;  protective  duties  will  neither  ex- 
clude foreign  goods  nor  raise  prices.  Hence,  to  the  many 
arguments  already  brought  against  protection,  we  must  add 
the  objection  that  it  does  not  protect.  Protective  duties, 
if  they  were  borne  by  the  foreign  producer,  would  accom- 
plish absolutely  none  of  the  objects  for  which  they  are 
established. 

The  oft-repeated  argument  that  protection  is  needed  to 
diversify  the  occupations  of  a  people  rests  on  the  hypothesis 
that  it  is  impossible  for  manufacturing  industry  to  exist  in 
a  young  country  unless  it  receives  fostering  aid.  But  this 
hypothesis  is  unwarranted.  When  a  country  is  first  settled 
and  sparsely  populated,  it  possesses  no  sufficient  supply  of 
labor  for  the  establishment  of  manufactures  on  an  extensive 
scale.  Gradually,  however,  as  population  increases,  there 
will  arise  various  branches  of  domestic  industry  which  will 
supplement  and  assist  in  various  ways  the  labor  of  those  who 
are  engaged  in  agriculture.  With  the  cultivation  of  less 
accessible  and  poorer  lands,  the  gains  of  farming  continue  to 
decrease,  and  the  law  of  diminishing  returns  gives  rise  to  the 
application  of  capital  and  labor  to  manufactures  and  trans- 
portation as  soon  as  any  department  of  these  occupations 
offers  promise  of  greater  remuneration  than  that  procured  in 
farming  under  the  least  favorable  circumstances.  The  im- 
position of  protective  duties,  however,  introduces  a  disturb- 
ing element,  and  induces  labor  and  capital  to  engage  in  less 


THE  DIVERSIFIED   INDUSTRY   ARGUMENT  337 

profitable  branches  than  they  would  otherwise  have  chosen. 
To  the  extent  that  they  effect  this  diversion  of  labor  and 
capital,  they  imply  production  carried  on  under  more  onerous 
conditions.  The  practical  result  will  be  not  only  a  general 
rise  of  prices,  but  an  increase  in  the  cost  —  cost,  be  it  remem- 
bered, in  the  sense  not  of  mere  money  outlay,  but  of  actual 
difficulty,  of  real  sacrifice  —  of  producing  goods.  These 
higher  prices  (or  this  higher  cost)  are  paid  by  whom  ?  There 
is  only  one  possible  answer  :  By  the  people  of  the  protectionist 
country.  Thus  tariffs  seek  to  accomplish  at  great  cost  what 
would  otherwise  have  been  effected  spontaneously  and  far 
more  cheaply  by  the  natural  evolution  of  industry  in  such  a 
country  as  the  United  States. 

Having  regard  to  the  geographical  position,  extent  of  ter- 
ritory, and  extraordinary  natural  resources  of  this  country, 
as  well  as  to  the  character  of  its  people,  trained  in  all  the 
arts  of  civilization  and  distinguished  beyond  all  others  by 
their  eminent  mechanical  and  business  talents,  there  seems 
no  valid  reason  why  we  should  not  take  a  position  of  com- 
manding influence  in  the  world  of  industry  and  commerce,  — 
a  position  to  which  no  other  people  on  earth  could  aspire. 
But  if  we  desire  to  command  a  market  for  our  products  in 
all  quarters  of  the  world,  we  must  be  prepared  to  admit  the 
products  of  other  countries  freely  to  our  own  markets,  and 
must  learn  to  seek  the  benefits  of  international  trade  not  in 
the  vain  ambition  of  making  other  countries  pay  tribute  in 
gold  and  silver,  but  in  that  which  constitutes  its  proper  end 
and  only  rational  purpose,  —  the  greater  cheapening  of  com- 
modities, and  the  increased  abundance  and  comfort  which 
result  to  the  whole  family  of  mankind. 

The  argument  that  protection  produces  economy  by  having 
goods  consumed  near  the  point  of  production,  is  in  a  large 
measure  fallacious,  for  if  people  import  an  article  from  a 
distance  it  shows  that  the  difference  in  price  more  than 
covers  its  cost  of  transportation.  Therefore,  the  economy 
of  importing  goods  must  be  sufficiently  great  to  cover  the 


338  PRINCIPLES   OF   POLITICAL   ECONOMY 

expenses  of  the  whole  trading  class  ;  else  goods  would  not  be 
imported.  The  idea  advanced  by  some  protectionists  that 
the  exporting  nation  bears  the  burden  of  transporting  goods, 
and  the  exporters  of  raw  products  consequently  bear  a 
heavier  burden  than  exporters  of  manufactured  goods,  is 
equally  unfounded.  In  order  to  prove  the  fallacy  of  this 
assumption,  let  us  inquire  what  would  be  the  effect  of  reduc- 
ing from  20  cents  to  10  cents  the  cost  of  transporting  a 
bushel  of  wheat  from  New  York  to  Liverpool.  If,  after 
this  reduction  in  freight,  American  wheat  continued  to  sell 
in  England  at  the  same  price  as  it  did  before,  the  profit 
realized  on  every  bushel  of  American  wheat  sold  in  England 
would  be  increased  by  10  cents.  This  opportunity  of  secur- 
ing extra  profit  would  inevitably  cause  increased  supplies  of 
American  wheat  to  be  sent  to  England,  and  this  would  con- 
tinue until  the  price  of  American  wheat  was  so  much  reduced 
in  England  that  it  was  not  more  profitable  to  sell  it  there 
than  in  America.  The  difference  in  the  price  of  wheat  in 
New  York  and  in  England  cannot  be  permanently  greater 
than  is  the  cost  of  exporting  wheat  from  New  York  to  Eng- 
land. If  therefore  this  cost  is  reduced,  the  price  of  American 
wheat  in  England  must  be  also  reduced  by  nearly  an  equiva- 
lent amount.  The  fall  in  price  would  not  probably  be  quite 
equal  to  the  reduction  in  the  cost  of  carriage  ;  because  as 
American  wheat  became  cheaper  in  England,  the  demand  for 
it  would  become  greater,  and  this  increase  in  demand  might 
produce  a  slight  rise  in  its  price  in  America.  It  still,  how- 
ever, is  certain  that  a  lessening  of  the  cost  of  carriage  would 
produce  an  almost  equivalent  reduction  of  price  in  the  im- 
porting country  ;  it  follows,  therefore,  that  the  cost  of  car- 
riage, instead  of  being  borne  by  the  exporting  country,  falls 
almost  entirely  upon  the  importing  country.  The  first  effect 
of  a  rise  in  the  freight  between  America  and  England  obvi- 
ously would  be  to  increase  the  price,  to  the  English  consumer, 
of  wheat  and  all  other  products  imported  from  America. 
The  immediate  effect  of  levying  a  protective  duty  upon  a 


PROTECTION   AND   PRICES  339 

foreign  product  is  to  increase  by  the  amount  of  the  duty  the 
expense  of  importing  the  commodity.  This  means  that  the 
foreign  product  must  be  sold  at  a  higher  price.  If  the  foreign 
product  formerly  sold  at  11.00  and  the  duty  is  50  per  cent, 
the  result  will  be  to  raise  the  price  of  the  article  to  about 
$1.50.  This  is  the  very  object  of  the  duty,  for  the  increased 
price  is  intended  to  induce  domestic  producers  to  engage  in 
the  industry.  If  domestic  producers  could  have  made  a  fair 
profit  before  the  duty  was  imposed,  there  is  manifestly  no 
need  to  encourage  capital  to  engage  in  this  industry  by  offer- 
ing the  inducement  of  artificially  high  prices.  Protection, 
therefore,  by  causing  artificially  high  prices,  cannot  under 
any  circumstances  be  regarded  as  conducing  to  cheaper 
production.  Very  few  of  our  "  infant  industries "  regard 
themselves  as  self-supporting,  and  the  industry  that  is  not 
self-supporting  causes  a  permanent  economic  waste  to  the 
whole  community.  Repeatedly,  moreover,  domestic  pro- 
ducers in  this  country  have  combined  to  raise  prices  behind 
the  barriers  of  the  protective  tariff.  Suppose,  for  example, 
that  foreign  goods  can  be  sold  here  at  81.00,  and  that  a 
duty  of  50  cents  is  imposed  in  order  to  preserve  the  home 
market  for  our  own  producers.  In  this  event  foreign 
goods  cannot  be  sold  here  for  less  than  81.50.  Now  sup- 
pose that  improved  methods  of  production  have  made  it 
possible  for  American  producers  to  sell  this  article  profit- 
ably at  $1.25.  If  they  form  a  combination,  they  can  keep 
the  price  at  a  level  far  above  the  cost  of  production  plus  a 
reasonable  profit ;  they  could,  in  the  example  here  given,  keep 
the  price  at  $1.49,  because  the  duty  excludes  foreign  com- 
petition at  any  price  less  than  $1.50.  As  a  matter  of  fact, 
a  number  of  our  important  products  are  now  regularly  sold 
to  foreign  customers  at  prices  lower  than  those  charged  to 
American  consumers.  Our  supposition  is  therefore  no  purely 
imaginary  one. 

When   there  is  no   such   combination    among    American 
producers  as  that  adverted  to,  the  article  above  referred  to 


340  PRINCIPLES   OF  POLITICAL   ECONOMY 

will  sell  for  $1.25,  if  domestic  producers  can  supply  all  the 
domestic  demand.  In  this  case  domestic  consumers  bear 
a  burden  of  25  cents  on  each  article  bought.  In  any  case, 
domestic  consumers  are  sure  to  bear  a  burden  proportionate 
to  the  greater  expense  at  which  the  domestic  article  is  pro- 
duced. This  burden  on  consumers  ceases  only  when  the 
domestic  money  cost  of  production  becomes  as  low  as  the 
foreign  cost,  —  and  then  the  protective  duty  is  no  longer 
needed. 

The  essential  features  of  the  free-trade  argument  may  be 
summed  up  in  the  following  five  points :  — 

(1)  From  the  view-point  of  consumption,  protective  duties 
tend  beyond  all  question  either  to  actually  increase  the  cost  of 
living  or  to  prevent  its  decrease.  Living  certainly  is  cheaper 
in  free-trade  countries  like  Belgium  and  England,  or  semi- 
free-trade  countries  like  Switzerland,  than  in  the  United 
States  or  in  France. 

Import  duties  usually  cause  an  increase  not  only  in  the 
price  of  imported  goods  upon  which  the  duty  is  levied,  but 
in  the  price  of  all  similar  goods  consumed  within  the  country. 
In  this  way  the  public  pays,  out  of  its  own  pocket,  in  the 
guise  of  increased  prices,  much  more  than  the  government 
actually  collects  in  customs  duties.  Suppose  for  instance 
that  France  imports  40,000,000  bushels  of  wheat,  and  that 
this  wheat  is  worth,  at  the  port  of  arrival,  $1.00  per  bushel. 
Because  of  foreign  competition  in  wheat,  the  300,000,000 
bushels  raised  in  France  will  also  bring  only  $1.00  per  bushel. 
This  is  precisely  why  French  farmers  complain.  Now  sup- 
pose that  in  accordance  with  the  demands  of  the  agricul- 
turists, a  duty  of  50  cents  per  bushel  is  levied  on  imported 
wheat.1  The  government  will  then  collect,  through  its  cus- 
toms officials,  (provided  the  duty  has  not  reduced  imports) 
the  sum  of  $20,000,000.  But  consider  the  position  of  the 

1  The  strongest  advocates  of  protection  in  France  and  Germany  are  the 
agricultural  classes.  In  Germany  their  influence  has  recently  resulted  in  the 
passage  of  a  high  protectionist  duty  on  imported  cereals. 


PROTECTION   AND   PKICES  341 

general  public.  Wheat  consumers  will  now  bear  an  addi- 
tional burden  of  50  cents  per  bushel  of  foreign  wheat,  or  a 
total  of  120,000,000,  —  the  amount  paid  to  the  government. 
But  this  is  not  all ;  the  consumers  will  pay  considerably 
more  than  this.  French  producers  will  naturally  sell  their 
wheat  at  the  same  price  as  foreign  wheat,  and  the  French 
people  will  therefore  pay  50  cents  more  for  every  bushel 
of  wheat  raised  in  France,  that  is,  an  additional  sum  of 
$150,000,000.  Above  and  beyond  the  amount  brought  into 
the  government  treasury,  $  150,000,000  must  be  paid  by  the 
public  to  native  wheat-growers  ;  thus  the  consumers  will  be 
compelled  to  bear  a  total  burden  of  $170,000,000,  because  of 
the  protective  duty  on  wheat  which  increases  the  govern- 
ment revenues  by  merely  $20,000,000. 

It  is  true  that  the  inverse  effect  may  take  place.  It  may 
happen  that  the  protective  duty,  by  keeping  prices  at  an 
artificially  high  level,  will  give  an  excessive  impetus  to  pro- 
duction, and  then,  because  of  relative  overproduction,  again 
entail  a  fall  in  prices.  At  the  present  time  this  very  phenom- 
enon is  taking  place  in  France  with  regard  to  wine-growing. 
The  high  duty  put  on  foreign  wines,  and  the  subsequent 
rise  in  prices,  led  to  so  great  a  production  of  wine  that  it 
exceeded  the  demand  and  resulted  in  the  failure  of  many 
wine-growers  to  dispose  of  their  goods.  The  same  result, 
although  on  a  smaller  scale,  has  taken  place  in  French  wheat- 
production. 

When  such  effects  as  these  are  the  result  of  protective 
duties,  wherein  does  their  advantage  consist?  Is  it  an  ad- 
vantage for  a  country  to  be  inundated  with  its  own  products 
rather  than  with  foreign  goods  ?  Is  it  not  true,  on  the 
contrary,  that  overproduction  at  home  is  worse  than  over- 
production abroad,  so  far  as  we  are  concerned  ?  For  against 
foreign  overproduction  we  can  defend  ourselves  very  simply 
by  purchasing  no  more  than  we  require,  whereas  the  refusal 
to  buy  native  products  will  cause  the  ruin  of  some  of  our 
fellow-citizens. 


342  PRINCIPLES   OF   POLITICAL   ECONOMY 

(2)  From   the   point  of   view  of   distribution,  protective 
duties  create  injustice,  because  their  effect  is  to  guarantee 
an  increased  income  to  the  producers  of  protected  goods. 
And  this  favoritism  is  all  the  more  objectionable  in  view  of 
the  fact  that  most  governments  persistently  refuse  to  grant 
to  laborers  a  legal  minimum  wage. 

(3)  Even   from   the   standpoint   of    national    production, 
which  protective  duties  are  supposed  to  foster  and  sustain, 
free  traders  contend  that  these  duties  really  do  an  incontest- 
able injury  to  home  production  by  increasing  the  cost  of  raw 
materials  (whenever  there  are  duties  on  raw  materials),  im- 
plements, machinery,  and  all  the  equipment  of  productive 
enterprises.1     We  have  already  explained  that  all  protective 
duties,  whether  on  raw  material  or  on  manufactured  goods, 
invite  capital  away  from  industries  in  which  a  nation  has 
unparalleled  advantages  into  industries  where  facilities  are 
not  so  good.     Their  immediate  effect,  therefore,  is  to  de- 
crease the  productivity  of  a  nation's  capital  and  labor  by 
turning  it  from  its  natural  channels  into  protected  industries 
and  thus  causing  economic  loss. 

It  has  been  observed  that  when  once  any  industry  is  pro- 
tected there  immediately  arises  the  necessity  to  protect  others, 
which  are  handicapped  by  having  to  pay  higher  prices  for  some 
of  the  goods  they  require.  "  Fire,"  says  Fawcett,  "  is  not 
more  certain  to  spread  amongst  inflammable  material  than 
is  protection,  when  once  sanctioned,  to  embrace  a  constantly 
increasing  number  of  industries  within  its  influence.  Each 
new  protective  duty  that  is  imposed  inevitably  creates  a 
demand  for  protection  in  other  industries."  Free  traders 

1  Sometimes  goods  are  admitted  to  a  country  free  of  duty  on  condition 
that  they  shall  be  reexported  in  a  different  form  within  a  given  space  of  time. 
Thus  some  countries  admit  iron,  wheat,  etc.,  free  of  duty  on  condition  that 
they  be  reexported  as  manufactured  goods.  The  producer  importing  these 
goods  must  give  some  guarantee  that  they  shall  be  exported  again  within  a 
given  period. 

Drawbacks  are  duties  which  are  repaid  when  goods  brought  into  the 
country  are  again  sent  out  of  it.  They  are  merely  restituted  customs  duties. 


FREE   TRADE   AND   PRODUCTION  343 

assert,  moreover,  that  nothing  is  better  calculated  to  exert 
a  deteriorating  influence  on  a  country  than  to  encourage  its 
industrial  classes  to  be  perpetually  looking  to  the  state  for 
assistance.  "  This  continual  law-making  about  industry  has 
been  prolific  of  industrial  and  political  mischief.  It  has 
tainted  our  political  life  with  log-rolling,  presidential  wire- 
pulling, lobbying,  and  custom-house  politics.  It  has  created 
privileged  classes  in  the  free  American  community,  who  were 
saved  from  the  risks  and  dangers  of  business  to  which  the 
rest  of  us  are  liable." l 

(4)  From  the  commercial  point  of  view  it  has  been  noted 
that  protective  duties  reduce  imports  and  thus  simultaneously 
tend  to  reduce  exports.     Hence  they  are  entirely  incompati- 
ble with  the  efforts  made  to  faciliate  intercourse  between 
nations  by  building  tunnels  through  mountains,  construct- 
ing canals,  spanning  the  seas  with  lines  of  subsidized  ships, 
laying  telegraphic  cables,  encouraging  international  exposi- 
tions, and  establishing  international  monetary  regulations. 
Can  anything  be  more  absurd  than  to  spend  millions  for  dig- 
ging canals  and  building  roads,  and  then  stationing  customs 
officials  at  both  ends  or  at  the  principal  sea-ports  of   the 
nation  in  order  to  restrict  the  passage  of  as  much  merchandise 
as  possible  ? 

(5)  From  the  point  of  view  of  industrial  progress  free  trad- 
ers hold  that  protective  duties  slacken  progress  by  remov- 
ing or  attenuating  foreign  competition.     Prince  Bismarck  in 
one  of  his  political  speeches  spoke  of  those  pike-fish  that  are 
sometimes  placed  in  carp-ponds  to  keep  the  carps  on  the  alert 
and  prevent  them  from  burying  themselves  in  the  mud.    The 
comparison    would    be  entirely  appropriate  in  this  connec- 
tion.    For  a  country  to  retain  its  rank  as  a  great  industrial 
and  commercial  power,  —  and  this  is  precisely  the  aim  of 
protectionists,  —  it   must    constantly    renew    its    industrial 
equipment  and  eliminate  those  methods  and  implements  that 

1  W.  S.  Sumner,  "Lectures  on  the  History  of  Protection  in  the  United 

States." 


344  PRINCIPLES   OF   POLITICAL   ECONOMY 

are  not  entirely  up-to-date.  This  necessity  is  always  more 
or  less  unpleasant  to  producers,  and  it  is  extremely  question- 
able whether  they  wo-uld  feel  it  or  submit  to  it  with  good 
grace  unless  they  were  forced  to  do  so  by  the  pressure  of 
foreign  competition. 

Thus  far  the  free  traders  appear  to  have  the  better  of  the 
discussion.  But  there  are  two  other  arguments  for  protec- 
tion that  have  considerable  force,  and  that  cannot  be  put 
aside  so  easily  as  the  preceding  ones. 

The  first  —  which  we  have  already  suggested  —  lies  in  the 
fact  that  a  nation,  having  the  right  to  exist  as  a  nation,  also 
has  the  right  and  the  duty  to  develop  all  the  dormant  possi- 
bilities of  economic  development  that  lie  within  it,  —  agricul- 
tural, industrial,  and  commercial.  It  should  strive  to  make 
the  best,  the  completest,  and  the  most  diversified  use  of  its 
soil,  its  climate,  and  the  qualities  of  its  population.  It  should 
not  be  willing  merely  to  become  a  wheel  in  the  universal 
mechanism,  but  should  develop  and  preserve  its  own  peculiar 
genius  and  native  characteristics. 

Protection  may  therefore  be  regarded  as  a  kind  of  disci- 
pline, like  that  which  prevents  a  pupil  from  having  his  tasks 
done  by  a  companion  more  able  than  he  and  which  thus 
obliges  him  to  do  them  himself.  Its  purpose  is  not  to  raise 
prices,  but  to  increase  home  production  sufficiently  to  meet 
all  the  needs  of  the  nation. 

There  is  of  course  some  truth  in  this  argument.  But,  it 
may  be  asked,  is  not  free  trade  a  superior  "  educative  "  system 
by  virtue  of  the  severer  discipline  to  which  it  subjects  home 
industry  and  agriculture  ?  Is  it  not  better  adapted  to  the 
development  of  the  unknown  resources  of  a  country  ?  This 
question  cannot  be  answered  dogmatically;  it  is  one  that 
each  country  must  answer  according  to  its  own  peculiar  tem- 
perament and  ideals. 

The  second  argument  is  that  the  deplorable  state  of  immi- 
nent war,  or  at  least  of  armed  peace,  that  characterizes  the 


NATIONAL  DEVELOPMENT   AND   DEFENCE  345 

beginning  of  the  twentieth  century  has  created  an  abnormal 
situation  and  temporarily  justifies  the  system  of  protection. 
As  we  happen  to  be  living  in  a  barbarous  epoch  wherein  all 
nations  fear  the  possibility  of  an  almost  universal  war,  it  is 
natural  that  each  country  should  defend  the  industries  that 
are  indispensable  to  its  own  safety.  These  indispensable 
industries  include  not  only  the  production  of  weapons  and  of 
food,  but  also  that  of  the  coal  which  is  necessary  to  propel 
trains  and  vessels,  as  well  as  the  iron,  horses,  wheat,  meat, 
cloth,  leather,  and  all  that  is  directly  or  remotely  necessary 
to  equip  and  maintain  thousands  of  men  under  arms.  Eng- 
land, to  be  sure,  imports  more  than  half  her  food  supply  from 
abroad  ;  but  she  dares  do  this  only  because  she  is  mistress  of 
the  great  maritime  routes,  and  because  she  expends  colossal 
sums  of  money  in  order  to  retain  her  naval  superiority.  If 
ever  she  had  reason  to  fear  that  her  maritime  intercourse 
might  be  interrupted,  there  is  no  doubt  that  she  would  at 
once  adopt  measures  for  increasing  her  agricultural  produc- 
tion, even  though  artificial  encouragement  were  found  neces- 
sary. Considering  the  vast  proportions  which  modern 
warfare  would  probably  assume,  and  the  probability  that 
nearly  the  whole  adult  male  population  of  belligerent  nations 
would  be  brought  under  arms,  as  well  as  the  likelihood  that 
all  the  economic  resources  of  the  nation  would  be  drawn  upon, 
it  may  be  truthfully  said  that  every  occupation  aids  to  some 
extent  in  the  national  defence. 

Granting  all  this,  we  must  nevertheless  inquire  whether 
protection  does  .not  have  precisely  the  effect  of  creating  the 
danger  against  which  it  pretends  to  defend  us.  Is  not  a 
"  tariff  war "  likely  to  provoke  war  of  the  bloodier  sort  ? 
And  would  not  free  trade  have  the  opposite  effect  by  making 
war  almost  impossible  ?  A  long  time  ago,  Montesquieu  said 
that  "the  natural  effect  of  commerce  is  to  produce  peace." 

At  all  events,  if  protection  is  accepted  as  a  military  neces- 
sity, it  must  then  be  considered  as  a  supplementary  expense 
added  to  the  war  budget,  and  not  as  a  national  revenue. 


346  PRINCIPLES   OF   POLITICAL   ECONOMY 

Thus,  one  American  economist  calculated  that  a  certain  spin- 
ning mill  had  cost  the  country  more  than  an  armed  cruiser. 
This  manner  of  considering  the  subject  does  not  appeal  to 
protectionists  ;  they  prefer  keeping  up  the  illusion  of  imagi- 
nary gains  for  the  nation.  But  why  should  they  fear  to  be 
frank  ?  It  would  be  better  to  declare  boldly  that  protective 
duties  and  tariff  wars  are  fully  as  good  as  armed  peace  and 
actual  warfare.  They  are,  perhaps,  quite  as  expensive  ;  but 
they  may  be  necessary  means  for  obtaining  a  due  share  in 
the  world's  prosperity  and  influence. 

VIII.    The  Relative  Importance  of  Foreign  and 
Domestic  Commerce 

Whatever  may  be  the  theoretical  merits  of  the  policy 
of  unrestricted  foreign  trade  or  of  that  which  would  erect 
tariff  barriers  between  nations,  it  would  be  unjustifiable  to 
leave  this  subject  without  calling  attention  to  two  matters 
which  are  often  overlooked. 

The  nations  of  the  earth  differ  widely  in  area,  population, 
the  nature  of  their  soil  and  subsoil,  in  the  qualities  of  their 
inhabitants  and  in  the  genius  of  their  institutions.  All  these 
elements  must  be  taken  into  account  in  the  discussion  of  a 
commercial  policy.  The  size  of  some  countries  is  such  that 
they  could  under  no  circumstances  aspire  to  national  self- 
sufficiency  in  economic  matters.  The  principality  of  Monaco, 
with  an  area  of  eight  square  miles  and  a  population  of  13,000, 
or  the  grand  duchy  of  Luxemburg,  with  an  area  of  about  1000 
square  miles  and  a  population  of  218,000,  would  scarcely  act 
wisely  in  cutting  off  foreign  trade.  This  is  equally  true 
of  Denmark,  Switzerland,  Belgium,  Portugal,  Greece,  Hol- 
land, Norway,  and  Sweden,  with  populations  ranging  from 
2,000,000  to  6,000,000.  There  is  but  little  variety  in  the 
products  of  these  nations.  Because  of  their  limited  size, 
the  uniformity  of  their  climate  and  their  soil,  they  lack  a 
large  number  of  raw  materials.  If  these  nations  undertook 


DIFFERENCES   AMONG   NATIONS  347 

to  produce  all  kinds  of  commodities  for  themselves,  the  di- 
vision of  labor  would  necessarily  be  of  the  crudest  sort. 

Countries  possessing  large  territory,  but  a  very  sparse  popu- 
lation—  like  the  Argentine  Republic  and  Brazil  —  are  in  a 
somewhat  different  position,  but  one  which  is  nevertheless 
not  altogether  unlike  that  of  the  above-mentioned  countries. 
These  vast  territories  contain  unlimited  and  varied  natural 
resources,  but  their  small  population,  a  great  part  of  which 
consists  of  negroes  or  of  uncivilized  indigenous  tribes,  makes 
it  impossible  to  carry  out  the  division  of  labor  to  any  great 
degree,  except  for  a  few  branches  of  production. 

The  domestic  commerce  of  such  nations  as  Belgium  and 
Holland,  for  instance,  is  of  less  importance  than  their  for- 
eign trade.  The  Dutch  have  become  wealthy  by  importing 
and  exporting  goods,  and  their  present  principal  source  of 
gain  is  the  forwarding  trade.  Norway  has  but  few  com- 
modities to  sell,  and  must  buy  a  multitude  of  things  abroad. 
Denmark,  Switzerland,  and  several  other  nations  occupy  a 
similar  position  economically. 

On  the  other  hand,  large  nations,  like  Russia  and  the 
United  States,  possessing  immense  territorial  dominions  and  a 
large  population  of  varied  character,  are  evidently  in  a  much 
more  favorable  position  for  the  development  of  their  economic 
self-sufficiency.  They  form,  as  it  were,  economic  worlds 
in  themselves,  and  would  suffer  little  loss  from  the  interrup- 
tion of  international  trade.  Russia,  with  an  area  of  over 
8,000,000  square  miles  and  a  population  of  nearly  130,000,000, 
and  the  United  States  with  an  area  of  3,000,000  square  miles 
(excluding  Alaska  and  our  colonies)  and  a  population  of 
almost  80,000,000,  evidently  are  not  in  the  same  category 
with  Holland  and  Portugal.  The  United  States  occupies  a 
compact  strip  across  the  Western  Continent,  extends  from  the 
subtropical  regions  to  the  region  of  long  winters  and  short 
summers,  and  includes  a  greater  variety  of  products  than  any 
other  one  country  in  the  world.  An  elaborate  system  of 
communication  and  transportation,  almost  unlimited  natural 


348  PRINCIPLES   OF   POLITICAL  ECONOMY 

resources,  and  the  singularly  inventive  turn  of  mind  of  our 
population,  give  the  United  States,  with  but  one-fifth  the 
population  of  China,  a  greater  productive  capacity  than  that 
country  possesses. 

Under  these  circumstances  it  is  not  surprising  that  our 
foreign  commerce  sinks  into  insignificance  when  compared 
with  our  domestic  trade.  The  total  value  of  imports  and 
exports  of  the  United  States  for  the  fiscal  year  1902  was 
$2,285,040,349,  and  although  this  amount  of  foreign  commerce 
was  exceeded  only  by  that  of  Great  Britain  and  Germany, 
our  domestic  trade  exceeded  our  foreign  trade  many  times 
over.  Within  the  borders  of  this  nation  lies  the  largest  free- 
trade  district  in  the  world,  with  a  volume  of  trade  surpass- 
ing the  entire  foreign  and  domestic  commerce  of  the  United 
Kingdom. 

It  is  of  course  a  more  difficult  matter  to  ascertain  the 
extent  of  domestic  commerce  than  that  of  foreign  trade.  As 
all  goods  imported  and  exported  must  pass  through  the  cus- 
toms houses,  where  their  kinds,  quantities,  and  values  go  on 
record,  the  amount  of  foreign  trade  can  be  learned  with  com- 
parative exactness.  The  same  is  not  true  of  domestic  trade. 
"  The  railroads  are  required  to  keep  an  account  of  the 
quantity  of  freight  they  carry,  but  not  of  the  value,  and  the 
kinds  of  goods  are  given  only  roughly.  On  the  watercourses 
it  is  still  more  difficult  to  know  what  the  trade  is  ;  figures 
are  published  stating  the  number  of  tons  of  freight  carried, 
but  many  of  them  are  only  estimated,  and  much  freight  never 
gets  on  record  at  all.  If  the  long-distance  traffic  is  thus 
imperfectly  known,  what  shall  be  said  of  the  local  trade  ? 
Farm  wagons,  drays,  local  express  companies,  and  delivery 
wagons  do  the  transporting  when  the  customer  does  not  carry 
away  his  purchases  by  hand  ;  only  the  dealers  can  give  even 
an  estimate  of  this  business,  and  that  they  rarely  do;  still 
more  rarely  is  the  sum  of  the  transactions  of  all  dealers 
within  a  locality  ever  known  with  any  degree  of  accuracy. 
Then  there  is  a  vast  amount  of  trading  in  which  merchants 


IMPORTANCE   OF   HOME  TRADE  349 

have  no  part ;  Peter  and  Andrew  trade  knives,  two  farmers 
in  the  backwoods  trade  horses,  a  gardener  sells  some  potatoes 
to  a  neighbor  —  the  volume  of  such  transactions  can  of  course 
never  be  known.  Our  compilation  of  statistics  for  domestic 
commerce  will  therefore  be  attended  with  much  uncertainty." 1 

Some  figures,  however,  recently  compiled  by  the  Treasury 
Bureau  of  Statistics,  which  has  become  a  part  of  the  newly 
founded  cabinet  Department  of  Commerce  and  Labor,  esti- 
mate the  internal  commerce  of  the  United  States  at 
120,000,000,000,  —  more  than  the  entire  international  com- 
merce of  the  world.  In  arriving  at  this  estimate,  the  Bureau 
of  Statistics  includes  only  one  transaction  in  each  article  pro- 
duced, whereas,  in  fact,  a  very  large  number  of  the  articles 
produced  pass  through  the  hands  of  several  middlemen  before 
reaching  the  consumer.2  The  estimate  is  based  on  the  figures 
of  the  Twelfth  Census,  which  put  the  total  value  of  manu- 
factures in  1900  at  $13,000,000,000,  those  of  agriculture 
at  nearly  14,000,000,000,  and  those  of  minerals  at  over 
$1,000,000,000.  Adding  to  these  the  products  of  the  fisher- 
ies, the  total  value  of  the  products  of  the  great  industries 
of  1900  would  be  $18,000,000,000.  The  rapid  growth  of  all 
lines  of  industry  since  1900,  especially  in  manufacturing, 
seems  to  justify  the  conclusion  that  even  a  single  transaction 
in  all  the  products  of  the  country  would  mean  an  aggregate 
for  1902  of  nearly  $20,000,000,000.3 

Estimating  the  domestic  commerce  of  the  country  at  former 
census  years  by  the  same  method,  the  Bureau  of  Statistics 
finds  that  our  total  domestic  commerce  has  grown  approxi- 

1  Clow,  "  Introduction  to  the  Study  of  Commerce,"  p.  104. 

2  The  term  commerce  applies  only  to  the  change  of  ownership,  as  we  have 
explained  ;  therefore  goods  which  are  kept  by  the  producer  for  his  own  use 
do  not  properly  fall  under  the  head  of  commerce.     But  the  amount  of  goods 
so  kept  is  relatively  small  and  constantly  decreasing. 

3  Mr.  C.  C.  Adams,inhis  "  Commercial  Geography,"  gives  $28,000,000,000 
as  the  value  of  our  domestic  trade,  without,  however,  explaining  how  he 
reaches  this  figure.     The  same  author  is  authority  for  the  statement  that  the 
people  of  the  United  States  buy  $40  worth  of  home  products  for  every  dollar 
they  expend  for  foreign  goods. 


350  PRINCIPLES   OF   POLITICAL   ECONOMY 

mately  as  follows  :  $2,000,000,000  in  1850  ;  13,500,000,000 
in  1860 ;  $6,250,000,000  in  1870  ;  $7,750,000,000  in  1880  ; 
and  $12,000,000,000  in  1890.  It  will  be  seen  from  this  esti- 
mate that  our  internal  commerce  has  increased  50  per  cent  in 
the  decade  from  1890  to  1900,  and  is  ten  times  as  large  in 
1902  as  in  1850  ;  meanwhile,  from  1850  to  1900,  the  popula- 
tion has  increased  three  and  one-half  times. 

The  foreign  commerce  of  the  nation  has  also  increased 
during  this  period,  but  it  is  far  from  approaching  the  impor- 
tance of  domestic  commerce. 

IX.   Some  Moderate  Forms  of  Protection 
Is  there  no  other  system  to  accomplish  the  object  for  which 
customs  duties  are  devised?     Can  there  not  be  protection 
without  protective  duties  ?      Theoretically,  yes  ;   by  means 
of  premiums  to  producers.1 

This  method  seems  to  offer  none  of  the  objections  to  which 
a  system  of  import  duties  gives  rise  ;  it  appears  to  be  supe- 
rior to  protective  duties  for  the  following  reasons  :  — 

(1)  Premiums  can  be  graded  at  will,  in  such  a  manner  as  to 
protect  those  producers  that  most  need  protection,  and  not 
the  others  ;  while  customs  duties  often  establish  an  unequal 
protection,  insufficient  for  the  weak  and  unnecessary  to  the 
strong.    Premiums  can  be  adjusted  to  the  cost  of  production, 
which  is  seldom  exactly  the  same  in  any  two  establishments. 
Within  any  industry  there  may  be  ten  or  a  hundred  dif- 
ferent  costs   of   production.       Some    establishments   barely 
manage  to  pay  expenses.      Others  make  large  profits  for 
selling    at    the   same    price    that    the    first    establishments 
receive. 

(2)  Premiums  of  this  kind  put  no  obstacle  in  the  way  of 

1  Premiums  on  production  must  not  be  confounded  with  export  premiums 
such  as  are  employed  by  several  nations  (Germany,  Austria,  and  France)  in 
the  case  of  sugar,  and  which  produce  the  strange  result  that  sugar  is  sold 
cheaper  abroad  by  these  countries  than  at  home.  It  is  likely  that  these 
premiums  on  exported  sugar  will  be  abolished  very  soon,  in  accordance  with 
an  international  agreement  made  in  1902. 


MODERATE   FORMS   OF   PROTECTION  351 

foreign  commerce  ;  they  permit  the  development  of  exporta- 
tion and  importation  and  do  not  raise  the  price  of  goods, 
whereas  customs  duties  involve  an  expensive  administration 
and  give  rise  to  the  systematic,  demoralizing  practice  of 
smuggling. 

(3)  They  are  least  likely  to  provoke  international  con- 
flicts. 

(4)  They  by  no  means  hinder  production,  since  they  do 
not  increase  the  price  of  raw  materials,  and  are  thus  not  open 
to  the  objection  of  artificially  raising  the  cost  of  production. 
On  the  contrary,  they  may  be  instituted  under  conditions 
that  will  stimulate  the  progress  of  particular  industries. 

(5)  Finally,  and  above  all,  this  system  does  not  purport  to 
be  anything  else  than  what  it  really  is,  namely,  a  sacrifice  im- 
posed upon  the  nation  for  reasons  of  public  utility.    It  gives 
rise  to  no  misconceptions,  and  sanctions  no  misrepresenta- 
tions.    The  public  knows  that  it  is  paying  for  this  "  protec- 
tion," and  knows  exactly  how  much  it  pays.     Herein  consists 
the  great  economic  and  moral  superiority  of  this  method. 
Customs  duties,  on  the  other  hand,  give  rise   among   the 
people  to  a  dangerous  misunderstanding  by  leading  them  to 
regard  as  a  gain  that  which  in  reality  is  a  burden. 

But  this  last  characteristic  explains  why  protectionists 
prefer  customs  duties.  Premiums  or  bounties  to  producers 
would  make  the  matter  too  plain.  This,  moreover,  is  why 
such  a  system  as  we  have  suggested  can  never  become  popu- 
lar. It  makes  altogether  too  palpable  and  evident  the  fact 
that  a  sacrifice  is  required  of  all  citizens  and  a  privilege 
accorded  to  the  few,  thus  violating  the  sentiment  of  equality. 
Its  successful  application,  furthermore,  requires  a  discern- 
ment and  an  impartiality  which  can  scarcely  be  hoped  for  in 
any  human  government.1 

1  Other  devices  have  also  been  employed  for  the  same  purposes  : — (a)  dif- 
ferential charges,  by  which,  for  example  in  Austria,  special  railroad  rates 
are  accorded  with  a  view  to  encouraging  the  exportation  of  certain  commodi- 
ties ;  (b)  guaranteed  interest  on  capital  invested  in  some  new  industry  which 


352  PRINCIPLES   OF   POLITICAL   ECONOMY 

Some  years  ago  there  began  a  movement  which,  without 
advocating  either  protection  or  free  trade  in  general,  favored 
reciprocity  in  the  matter  of  customs  tariffs.  In  England  this 
is  called  fair  trade,  as  opposed  to  free  trade.  It  is  often- 
times argued  that  by  the  adoption  of  restrictions  upon  trade 
nations  do  each  other  injury.  It  is  said  that  free  trade 
would  be  all  very  well  if  every  nation  adopted  it ;  but  as 
long  as  other  nations  impose  tariffs  on  our  goods,  we  must 
be  prepared  to  retaliate.  Some  of  those  who  hold  this  view 
regard  a  tariff  simply  as  a  diplomatic  means  of  securing 
mutual  concessions,  "sometimes  treating  these  concessions 
as  steps  toward  a  general  policy  of  tariff  reduction  the  world 
over,  which  was  the  plan  pursued  by  the  ministers  of  Napo- 
leon III;  sometimes  bargaining  for  them  as  special  privileges 
not  to  be  granted  to  the  world  in  general,  which  is  the  idea 
underlying  the  present  reciprocity  treaties  of  the  United 
States. 

"  When  this  view  is  accepted,  a  policy  of  tariff  warfare 
follows  as  a  matter  of  course.  There  are  times  when  it 
seems  as  though  a  great  many  nations  were  carried  away 
with  this  spirit  of  commercial  hostility."  l  When  this  system 
is  employed  by  way  of  reprisals  to  compel  a  protectionist 
country  to  reduce  its  duties,  —  if,  for  example,  England 
should  answer  the  high  tariffs  of  the  United  States  by 
heavily  taxing  American  products,  —  it  may  very  well  be 
justified.  In  such  a  case,  however,  the  question  of  tariffs  is 
political  rather  than  economic. 

But  if  we  regard  this  conception  as  a  scientific  theory,  we 
find  that  it  has  no  logical  basis.  For  if  the  protectionist 
system  is  good,  it  should  be  adopted;  if  it  is  bad,  it  should 
be  abandoned.  The  question  whether  other  countries  have 

it  is  desirable  to  encourage  (often  used  in  South  America  and  Mexico)  ; 
(c)  tax  exemptions  or  reductions  for  new  industries  which  a  government 
seeks  to  acclimatize,  —  frequent  examples  of  which  method  are  offered  by 
Hungary  and  Roumania. 

1  A.  T.  Hadley,  "Economics,"  p.  444. 


COMMERCIAL   TREATIES  353 

adopted  it  or  not  has  no  bearing  on  the  problem ;  that  is 
their  concern,  not  ours.  No  doubt  if  the  states  of  Europe 
were  to  levy  duties  on  American  products,  they  would  harm 
the  United  States.  But  they  would  also  harm  themselves; 
and  the  evil  which  we  are  in  a  position  to  do  our  neighbors 
cannot  be  regarded  as  a  compensation  for  that  which  we 
inflict  upon  ourselves. 

Another  form  of  moderate  protection  consists  of  counter- 
vailing duties.  Its  advocates  assert  that  when  a  country  is 
more  heavily  burdened  by  taxation  than  foreign  nations,  it 
should,  in  order  to  reestablish  equality  in  competition,  burden 
foreign  products  with  duties  at  least  equal  to  the  taxes  paid 
by  native  producers. 

We  must  be  careful  to  understand  just  what  this  mean,s. 
If  it  means  simply  that  those  goods  which  within  the  country 
are  burdened  with  certain  taxes,  —  like  whiskey  and  tobacco, 
—  should  be  taxed  to  the  same  extent  when  imported  from 
abroad,  no  one  will  challenge  this  principle  of  fiscal  equality. 
But  if  it  means  that  whenever  a  country  has  the  misfor- 
tune to  be  oppressed  by  heavy  taxes  of  all  kinds,  it  can 
lighten  this  burden  by  imposing  high  customs  duties  on 
foreign  goods,  it  is  utterly  absurd.  Indeed,  such  an  argu- 
ment is  entirely  based  on  the  notion  that  customs  duties  are 
paid  by  foreign  exporters.  If,  as  we  have  endeavored  to 
show,  these  duties  really  fall  on  our  own  people  in  the  form 
of  higher  prices,  then  we  may  grasp  the  peculiar  nature  of 
this  plan  of  compensation,  which,  under  pretence  of  equal- 
izing the  struggle,  doubles  the  burdens  of  a  nation  that  is 
already  most  heavily  laden. 

X.    Commercial  Treaties 

Between  the  system  of  free  trade  (meaning  laissez  faire 
and  competition)  and  that  of  protection  (meaning  national 
autonomy  and  governmental  regulation)  there  is  fortunately 
another  commercial  policy,  namely,  that  which  is  founded 
on  international  agreement  and  which  we  may  call  the  con- 


354  PRINCIPLES    OF   POLITICAL   ECONOMY 

tractual  system.  It  may  be  regarded  as  a  true  outcome  of 
the  spirit  of  international  amity,  and  the  expression  of  vol- 
untary solidarity.  We  have  already  given  utterance  to  the 
hope  that  this  solidarity  will  ultimately  become  the  normal 
method  of  regulating  economic  relations  among  individuals 
(see  pages  38-40)  ;  similarly,  we  hope  that  it  may  become  the 
customary  manner  of  determining  relations  among  nations. 
Such  is  in  fact  the  present  tendency.  Commercial  treaties,  by 
which  nations  peacefully  and  carefully  reach  some  definite 
and  permanent  agreement  with  regard  to  their  economic  rela- 
tions to  one  another,  seem  the  wisest  policy  that  an  enlight- 
ened nation  can  adopt.  They  place  reasonable  limitations 
upon  countries  that  are  disposed  to  make  exaggerated  claims. 
They  give  rise  to  a  reciprocity  of  interests,  and  lay  the  foun- 
dation of  friendliness  and  solidarity  among  the  contracting 
nations.1 

Commercial  treaties  offer  the  following  advantages :  — 

(1)  They  guarantee  the  stability  of  tariffs  during  a  defi- 
nite period,  generally  ten  years.     This  circumstance  is  very 
favorable  to  the  development  of  commerce.     It  is  of  course 
true,  on  the  other  hand,  that  they  bind  the  contracting  nations 
and  thus  deprive  them  of  the  privilege  of  changing  their  cus- 
toms duties  according  to  varying  circumstances  ;    but  this 
immutability  should  be  regarded  as  a  good,  not  as  an  evil. 

(2)  They  permit  of  a  differentiation  of  duties,  according  to 
the  country  with  which  the  treaty  is  made,  whereas  customs 
duties  otherwise  are  necessarily  uniform  and  special  provision 
cannot  be  made  for  differences  in  the  economic  conditions 
of  various  nations.      It  is  true  that  this  advantage  is  practi- 
cally almost  done  away  with  by  the  so-called  "  most  favored 
nation  clause,"  which  is  usually  inserted  in  all  treaties,  and 
by  virtue  of   which  any  concession  made  by  one  nation  to 

1  The  commercial  treaties  recently  made  by  Germany,  Austria,  Switzer- 
land, and  Belgium  have  founded  a  sort  of  Central  European  customs  union. 
The  United  States  has  tried  —  thus  far  without  much  success  —  to  form  a 
customs  union  that  shall  include  all  the  American  republics. 


COMMERCIAL   TREATIES  355 

another  is  immediately  extended  ipso  facto  to  all  other  nations 
having  previously  made  treaties  with  the  contracting  nation. 

(3)  They  lead  gradually  to  a  more  liberal  regime  and  to 
the  abolition  or  lowering  of  barriers  between  nations,  because, 
with  every  renewal  of  a  commercial  treaty,  the  contracting 
parties  wrest  concessions  from  each  other  ;  whereas  the  pro- 
tective system,  once  firmly  established  in  a  country,  tends  to 
grow  more  radical  and  more  general,  for  the  reason  that  all 
classes  of  the  community  claim  a  share  of  the  spoils. 

There  can  be  no  doubt  that,  in  many  European  countries, 
the  recent  rapid  increase  in  the  amount  of  goods  imported 
from  America  has  given  rise  to  a  movement  in  favor  of  pro- 
tective measures  against  American  products.  Particularly 
in  Continental  Europe  this  tendency  appears  to  be  growing 
stronger,  and  may  culminate  in  measures  that  will  seriously 
restrict  American  exportation  to  those  countries.  The  adop- 
tion of  commercial  treaties  upon  the  basis  of  mutual  tariff 
concessions,  however,  will  doubtless  be  found  the  most  suc- 
cessful method  of  preserving  and  extending  the  European 
markets  conquered  by  American  goods. 


CHAPTER  V  — CREDIT 
I.   Credit  is  only  an  Extension  of  Exchange 

CREDIT  is  protracted  exchange,  that  is  to  say,  exchange 
which  is  not  complete  until  a  certain  period  of  time  has 
elapsed.  Introduce  the  element  of  time  into  exchange,  and  it 
becomes  credit.  Hence  credit  may  be  defined  as  the  exchange 
of  present  wealth  for  future  wealth. 

For  example  :  I  sell  you  some  wool,  but  you  have  no  money 
with  which  to  pay  me,  i.e.  no  present  wealth  to  give  me  in 
exchange  for  what  you  have  received.  This  does  not  pre- 
clude exchange  between  us.  All  that  you  will  have  to  do  is 
to  give  me,  in  exchange,  part  of  the  wealth  which  you  intend/ 
to  create  with  the  wool,  —  say  an  equivalent  value  in  cloth 
when  you  have  manufactured  it  of  the  wool  I  gave  you. 

In  this  example  the  underlying  exchange  is  perfectly  obvi- 
ous. The  transaction  is  a  sale,  differing  from  ordinary  sales 
only  in  the  circumstance  that  payment  is  not  made  immedi- 
ately but  at  some  future  date.  Now  this  difference,  which 
appears  to  have  little  significance,  has  very  important  conse- 
quences. It  is,  indeed,  no  small  matter  to  introduce  the 
element  of  futurity  into  the  domain  of  contracts. 

There  is  another  kind  of  transaction  in  which  the  under- 
lying fact  of  exchange  is  less  perceptible,  Suppose  that, 
instead  of  selling  you  the  wool,  I  lend  it  to  you ;  that  is  to  say, 
its  transfer  is  conditioned  upon  the  return  of  some  equiva- 
lent when  you  have  used  the  wool  to  make  cloth.  Evidently, 
you  will  not  return  to  me  the  same  wool  that  I  lent  you,  for 
you  have  employed  it  to  make  the  cloth.  You  can,  however, 
give  me  an  equal  value  when  you  have  sold  the  cloth. 
Here  again,  although  there  has  really  been  no  sale  on  my 

356 


CREDIT   IS   PROTRACTED   EXCHANGE  357 

part,  it  is  obvious  that  present  goods  have  been  exchanged 
for  future  goods. 

The  operations  just  described — sale  on  condition  of  pay- 
ment at  some  future  date,  and  loan  —  are  the  two  essential 
forms  of  credit. 

Other  things  being  equal,  present  goods  are  always  more 
desirable  than  future  goods.  Goods  for  which  we  must  wait 
have  less  value  than  those  already  in  our  possession.  When, 
therefore,  present  wealth  is  exchanged  for  future  wealth,  the 
equilibrium  of  exchange  must  be  established  by  requiring 
the  borrower  to  give  back  a  somewhat  higher  value.  When 
payment  is  deferred  the  price  of  goods  is  likely  to  be  higher 
than  when  cash  is  paid;  the  difference  between  the  two  prices 
is  commonly  called  discount.  Wholesale  business  houses 
generally  give  discounts  for  the  immediate  payment  of  bills, 
or  for  their  payment  in  shorter  periods  than  are  customarily 
allowed.  The  same  principle  explains  why  in  the  case  of 
loans  the  sum  returned  is  always  somewhat  larger  than  the 
sum  loaned,  the  difference  being  called  interest.* 

Credit  involves  the  following  characteristics  :  —  (1)  The 
consumption  of  the  object  sold  or  loaned  ;  (2)  the  expecta- 
tion of  some  new  object  of  value  to  take  its  place.  The  man 
who  lets  a  house  or  a  farm  knows  perfectly  well  that  the 
house  or  farm  remains  the  same  whether  he  or  a  tenant  occu- 
pies it,  and  that  it  will  ultimately  be  restored  to  him.  But 
the  man  who  yields  an  object  designed  for  consumption 
knows  that  he  loses  all  control  over  the  object.  He  knows 
that  it  will  be  destroyed  ;  that,  in  fact,  is  its  purpose.  Wheat, 
for  instance,  must  be  ground,  to  produce  flour  ;  it  must  be 
planted,  to  give  a  new  crop.  Even  money  must  be  spent  or 
invested  in  some  way  before  it  can  produce  additional  money. 

The  destruction  of  wealth,  it   should  be  noted,  for  the 

1  Consult  Boehm-Bawerk,  "Capital  and  Interest."  In  this  section  we 
have  nothing  to  do  with  the  question  whether  discount  and  interest  are  legit- 
imate, nor  with  the  question  whether  they  can  be  done  away  with.  These 
questions  come  under  Distribution. 


358  PRINCIPLES    OF    POLITICAL   ECONOMY 

purpose  of  creating  future  wealth,  is  always  a  problematical 
operation  for  both  lender  and  borrower. 

Consider  first  the  lender.  He  always  incurs  more  or  less 
risk.  To  be  sure,  he  expects  to  receive  more  than  an  equiva- 
lent amount  of  future  wealth.  But  this  anticipated  wealth  does 
not  yet  exist ;  before  he  can  receive  it,  it  has  to  be  produced, 
and  whatever  is  future  is  ipso  facto  uncertain.  For  this 
reason  legislators  have  sought  to  devise  means  for  protecting 
the  lender  against  loss  ;  and  the  devices  and  precautions 
which  they  have  introduced  from  time  to  time  constitute 
one  of  the  most  important  branches  of  civil  law  :  guaranty, 
liability,  mortgages,  etc.  Notwithstanding  legal  protection, 
the  lender  always  must  have  more  or.  less  confidence  in  the 
borrower.  This  is  why  the  term  "  credit "  is  applied  to  this 
particular  kind  of  loan.  Credit,  as  the  word  itself  indicates 
(credo,  I  believe),  means  faith. 

Consider  now  the  borrower.  Unlike  the  tenant  of  a  house 
or  a  farm,  the  borrower  is  not  bound  to  preserve  intact  the 
object  lent  to  him,  and  to  return  it  to  the  owner  at  the 
expiration  of  a  fixed  period.  In  using  it,  that  is  to  say  in 
destroying  it,  he  must  create  an  equivalent  value  with  which 
he  can  meet  his  debt  when  it  is  due.  He  must  therefore  be 
extremely  careful  to  employ  this  wealth  productively.  If  he 
consumes  it  unproductively  (e.g.  for  personal  expenses),  or 
even  if  he  fails  to  reproduce  an  amount  of  wealth  at  least 
equal  in  value  to  that  which  he  borrowed,  he  suffers  a  loss. 
A  list  of  the  unfortunate  borrowers  of  all  nations  and  of 
all  epochs,  whose  ruin  was  due  largely  to  the  misuse  of 
credit,  would  be  interminable.  Credit,  therefore,  is  an  infi- 
nitely more  dangerous  productive  device  than  those  we  have 
heretofore  considered.  It  is  likely  to  render  efficient  service, 
in  production,  only  in  communities  which  have  reached  a  high 
stage  of  industrial  education  and  development. 


THE    INVENTION    OF   NEGOTIABLE   PAPER  359 

II.   The  History  of  Credit 

Of  all  systems  of  economic  organization,  that  based  on 
credit  is  the  most  recent.  In  fact,  its  function  is  too  complex 
to  permit  of  its  introduction  among  primitive  peoples.  At 
present  it  presupposes  the  accumulation  of  capital  in  the 
form  of  money,  although  among  primitive  peoples  credit 
appears  to  have  existed  in  the  custom  of  lending  cattle.  It 
may,  indeed,  be  held  that  loans  played  an  important  part  in 
Antiquity  and  in  the  Middle  Ages.  This  is  true.  But  loans 
were  then  regarded  simply  as  a  kind  of  assistance  given  by 
members  of  the  same  family  or  of  the  same  social  class  to 
each  other  in  cases  of  exceptional  need,  or  as  a  method  of 
exploiting  foreigners  and  members  of  other  social  classes.1 
Credit  was  rarely  employed  as  a  method  of  encouraging  pro- 
duction. Hence  the  opprobrium  which  attached  to  the  loan 
of  money  or  goods,  and  the  riots  which  were  frequently 
caused  by  debts  of  this  nature.  In  the  loan  contracts  of  the 
Middle  Ages  the  church  fathers  endeavored  to  distinguish 
those  cases  in  which  loans  aided  production  (and  for  which 
they  admitted  that  interest  was  legitimate)  from  those  in 
which  it  was  clearly  unproductive  (in  which  cases  they  called 
interest  usury  and  forbade  it).  They  did  not  reason  so  poorly 
as  some  critics  have  supposed,  inasmuch  as  the  measures 
that  they  adopted  were  dictated  by  the  needs  of  the  epoch. 

As  a  means  of  facilitating  production,  credit  arose  only 
when  it  became  possible  to  regard  future  wealth,  —  which  is 
the  true  object  of  credit,  —  as  commercially  transferable  from 
one  person  to  another.  This  important  step  was  accomplished 
by  the  invention  of  negotiable  paper,  —  credit  instruments  that 
may  be  bought  and  sold  in  the  market  in  much  the  same  way 
that  other  goods  are.  The  use  of  negotiable  paper  dates 
probably  from  the  thirteenth  century.2 

1  "  Unto  a  stranger  thou  mayest  lend  upon  usury  ;  but  unto  thy  brother 
thou  shalt  not  lend  upon  usury"  (Deuteronomy  xxiii.  20). 

2  Professor   Hildebrand,    one   of  the  founders  of  the  German  historical 
school  of  economists,  made  credit  the  basis  of  his  division  of  economic  evolu- 


360  PRINCIPLES    OF    POLITICAL   ECONOMY 

At  the  outset,  credit  instruments  were  not  regarded  as 
wealth,  because  they  were  neither  consumable  nor  at  all  like 
material  objects.  A  credit  instrument  was  considered  as  a 
purely  personal  bond  between  creditor  and  debtor.  In  the 
significant  words  of  the  commentators  on  classical  Roman  law, 
the  obligation  adhered  to  the  body  or  person  of  the  debtor,  — 
ossibus  haeret.  If  the  debtor  failed  to  repay,  the  creditor 
could  not  seize  his  goods  ;  there  was  nothing  which  he  could 
seize  but  the  person  of  the  debtor.  Roman  law  permitted 
the  creditor  to  imprison  the  debtor  or  even  to  cut  him  in 
pieces,  —  as  the  law  of  the  Twelve  Tables  puts  it,  in  partes 
secanto.  Under  such  circumstances  as  these,  the  conception 
of  transferable  credit  claims  could  not  arise. 

But  it  was  not  long  before  Roman  jurists  took  a  great  step 
forward ;  credits  or  claims  came  to  be  regarded  as  wealth 
(jbona))  and  by  means  of  ingenious  devices  they  were  even 
made  transferable  (e.g.  by  what  was  called  novatio  and  litis- 
contestatio) -1  The  transfer  of  credits,  however,  continued  to 

tion.  The  first  period  was  that  of  natural  economy,  in  which  there  was  no 
exchange  or  in  which  exchange  took  the  form  of  barter  ;  the  goods  that  were 
produced  were  consumed  by  the  producers,  and  there  was  little  or  no  change 
in  the  ownership  of  wealth.  The  second  was  that  of  money  economy,  marked 
by  the  introduction  of  sale  and  purchase.  Exchange,  which  played  an 
important  part  in  the  economic  life  of  the  community,  was  facilitated  by  the 
use  of  money.  The  third  period  is  that  of  credit  economy,  characterized  by 
the  custom  of  deferred  payment,  by  loans,  and  by  other  forms  of  protracted 
exchange  transactions. 

This  threefold  division  of  economic  evolution  into  Naturwirthschaft,  Geld 
wirthschaft,  and  Creditwirthschaft  must  not  be  supposed  to  imply  that  at  any 
time  one  of  these  systems  prevailed  alone.  It  is  probable  that  barter  will 
never  entirely  disappear ;  indeed,  we  have  shown  that  in  many  respects  we 
have  returned  to  what  is  practically  a  system  of  barter,  e.g.  in  international 
trade.  Credit,  on  the  other  hand,  existed  in  an  embryonic  form  among  prim- 
itive tribes,  where  the  custom  prevailed  of  lending  food  or  cattle.  The  above 
division,  however,  is  true  in  the  sense  that  certain  periods  have  been  charac- 
terized by  the  predominance  of  one  system. 

Credit  economy  is  only  in  its  beginnings.  There  may  come  a  time  when  it 
will  do  away  entirely  with  money.  (See  page  290.) 

1  Credit  has  likewise  undergone  another  transformation  which  we  can 
only  indicate  here  because  it  belongs  to  the  domain  of  law  rather  than  that 


TRANSFERABLE   CREDIT   CLAIMS  361 

be  more  difficult  than  the  transfer  of  ordinary  material  goods, 
and  even  to-day,  according  to  the  French  Civil  Code  (which 
may  be  regarded  as  the  heir  and  outcome  of  the  Roman  legal 
system),  the  transfer  of  credit  instruments  involves  formal- 
ities of  a  somewhat  complicated  nature,  —  especially  the 
notification  of  the  debtor. 

But  business  law  has  always  progressed  more  rapidly  than 
civil  law  and  served  as  a  pioneer  of  legal  evolution.  Thus, 
in  the  Middle  Ages,  business  law  —  the  "  law  merchant  "  — 
devised  admirable  means  of  representing  credit  claims  by 
certificates,  transferable  simply  by  indorsement.  The  most 
important  kinds  of  negotiable  credit  instruments  ("  commer- 
cial paper")  are  bills  of  exchange  and  promissory  notes.1 

of  economics.  It  has  lost  the  character  of  an  exclusively  personal  matter, 
which  it  possessed  at  the  outset,  and  become  real,  that  is  to  say,  it  is  now 
based  upon  some  material  security  or  lien,  or  at  least  upon  the  property 
of  the  debtor. 

Nevertheless,  there  appears  here  to  be  another  example  of  that  strange 
spiral  evolution  of  which  we  have  already  mentioned  several  examples  (page 
287,  note),  inasmuch  as  the  tendency  now  is  to  revert  to  personal  credit,  i.e. 
credit  based  solely  on  faith,  —  which  is  the  true  and  highest  significance  of 
the  term.  Examples  of  this  are  "lines  of  credit,"  cooperative  credit  socie- 
ties, etc. 

1  In  the  case  of  a  bill  of  exchange  the  creditor  who  has  sold  goods  makes 
out  a  paper  to  this  effect :  — 

NEW  YORK,  March  1,  1903. 
To  William  Wilson  [the  debtor],  Chicago,  Illinois. 

At  sight  of  this  bill,  pay  to  John  Jones,  or  order,  One  Hundred  Dollars, 
for  value  received. 

(Signed')     HENRY  BROWN  [the  creditor]. 

Brown  will  sell  this  bill  to  Jones,  who,  if  he  chooses,  may  transfer  it  to 
any  one  else  by  indorsing  it. 

The  following  is  the  form  of  a  promissory  note,  made  out  by  a  purchaser 
of  goods,  or  a  borrower,  to  his  creditor  :  — 

PHILADELPHIA,  March  1,  1903. 

Three  months  after  date  I  promise  to  pay,  to  Henry  White  [the  creditor], 
or  order,  the  sum  of  Five  Hundred  Dollars,  with  interest  at  five  per  cent, 
for  value  received. 

(Signed)    PHILIP  JOHNSON  [the  debtor]. 


362  PRINCIPLES   OF   POLITICAL   ECONOMY 

Promissory  notes  are  written  promises  to  pay  a  sum  of 
money  upon  demand  or  at  some  specified  time.  These  notes 
may  be  transferred  at  will  from  one  person  to  another,  and 
circulate  almost  as  freely  as  money.  The  payee  or  holder  of 
the  note  may,  by  writing  an  order  on  the  back  and  signing 
his  name,  make  the  note  payable  to  a  third  person.  By 
indorsing  the  note  in  this  manner,  any  holder  may  use  it  as 
a  means  of  paying  his  debts.  When  the  final  holder  presents 
it  for  payment,  it  may  have  effected  a  number  of  exchanges. 

Transferability  by  indorsement  is  a  marvellous  simplifica- 
tion ;  but  indorsement  is  nevertheless  a  formality,  and  one 
of  no  mean  importance,  since  it  involves  the  legal  responsi- 
bility of  all  those  who  sign  the  paper.  Greater  simplicity 
and  wider  use  is  attained  by  suppressing  the  need  for  a  sig- 
nature, and  creating  credit  instruments  that  may  be  passed 
from  hand  to  hand  as  easily  as  money  (e.g.  notes  payable  to 
the  bearer). 

With  the  accomplishment  of  this  step  we  reach  the  latest 
stage  in  the  evolution  of  credit.  Henceforward  vast  amounts 
of  wealth  —  not  fictitious  wealth,  but  future  wealth,  which 
is  something  quite  different  —  are  added  to  the  sum  total  of 
present  wealth,  and  circulate  in  the  form  of  negotiable  paper, 
or  of  paper  payable  to  the  bearer.  These  credit  instruments 
of  various  kinds  are  now  used  to  an  extent  that  but  a  few 
years  ago  would  have  been  almost  inconceivable,  and  have 
given  rise  to  a  class  of  persons  called  bankers,  whose  business 
it  is  to  deal  in  these  instruments. 

An  investigation  made  some  years  ago  by  the  Comptroller 
of  the  Currency,  concerning  the  use  of  various  kinds  of 
money  and  the  use  of  checks,  drafts,  and  other  credit  in- 
struments in  the  national  banks  of  the  United  States,  dis- 

A  promissory  note  is  simply  a  promise  to  pay  made  by  a  debtor  to  his 
creditor,  but  which  the  latter  can  transfer  to  other  persons.  A  bill  of  ex- 
change (also  called  a  draft}  is  somewhat  more  complicated ;  it  is  an  order 
addressed  by  the  creditor  to  his  debtor  instructing  him  to  pay  a  certain  sum 
to  some  third  person,  designated  in  the  bill,  or  his  order, 


THE   ADVANTAGE   OF   NEGOTIABLE  PAPER  363 

closed  that  less  than  10  per  cent  of  the  receipts  (in  1892) 
were  in  cash  ;  in  the  larger  cities,  such  as  New  York,  metallic 
money  represented  only  2  or  3  per  cent  of  the  bank  receipts. 

But,  it  may  be  asked,  what  great  advantage  is  there  in 
representing  credit  by  negotiable  paper  ? 

Although  it  is  exceedingly  desirable  for  a  borrower  or  a 
person  that  buys  on  credit  to  have  some  capital  at  his  dis- 
posal during  a  given  period,  it  is  not  always  convenient  for 
the  lender  or  the  seller  to  be  obliged,  during  the  same  period, 
to  do  without  the  money  that  is  due  him.  A  manufacturer 
daily  finds  it  necessary  to  make  purchases  and  to  pay  wages ; 
his  business  cannot  continue  unless  his  supply  of  capital  is 
replenished  from  day  to  day  by  the  sale  of  his  manufactures. 
Suppose,  however,  that  his  manufactures  are  sold  on  credit, 
i.e.  not  for  immediate,  but  for  future,  payment ;  in  this  event 
it  would  seem  impossible  for  him  to  continue  his  business. 

What,  in  this  case,  shall  he  do?  It  would  appear  that  the 
same  capital  cannot  be  at  the  disposal  of  two  persons  at  the 
same  time,  —  at  the  disposal  of  the  lender  as  well  as  the  bor- 
rower. Yet  this  apparent  impossibility  is  accomplished  by 
means  of  negotiable  paper.  In  exchange  for  the  capital 
which  really  belongs  to  him,  but  which  he  has  for  a  time 
relinquished,  the  lender,  or  the  dealer  who  sells  on  credit, 
receives  an  acknowledgment  in  the  form  of  a  bill  of  ex- 
change or  a  promissory  note  or  some  other  negotiable  or 
transferable  paper  ;  this  paper  represents  a  value  which,  like 
all  other  values,  can  be  bought  and  sold.  Should  the  lender 
want  his  money,  nothing  is  more  simple  than  to  get  it ;  all 
he  has  to  do  is  to  sell  this  paper,  i.e.  in  the  language  of 
bankers,  negotiate  it.1 

III.   Can  Credit  create  Capital? 

Credit  has  acquired  such  importance  in  modern  society 
that  we  are  tempted  to  ascribe  miraculous  powers  to  it. 

1  The  expression  buying  and  selling  exchange  is  used  frequently,  and  has 
reference  to  dealings  in  bills  of  exchange. 


364  PRINCIPLES    OF    POLITICAL   ECONOMY 

Speaking  constantly  of  great  fortunes  founded  on  credit, 
and  recognizing  that  the  most  extensive  enterprises  of  mod- 
ern industrial  life  are  built  upon  a  basis  of  credit,  we  are 
easily  persuaded  that  credit  is  a  factor  of  production,  and 
that  it  can  create  wealth  quite  as  well  as  land  or  labor. 

But  this  is  an  illusion.  Credit  is  not  a  factor  or  agent  of 
production.  It  is  a  particular  method  of  production,  —  which 
is  quite  a  different  matter,  — just  like  exchange  and  the  divi- 
sion of  labor.  It  consists,  as  we  have  said,  of  the  transfer  of 
wealth  or  capital  from  one  person  to  another.  But  to  trans- 
fer is  not  to  create.  Credit  can  no  more  create  wealth  than 
exchange  can  create  commodities.  As  John  Stuart  Mill  has 
neatly  put  it,  "  Credit  is  simply  permission  to  use  the  capital 
of  others." 

What  gives  rise  to  the  misconception  which  we  are  now 
discussing  is  the  existence  of  credit  instruments.  We  have 
seen  that  loaned  capital  is  represented  by  an  equal  value  of 
negotiable  paper  held  by  the  lender.  Hence  it  appears  as 
though  the  act  of  lending  doubles  the  amount  of  capital. 
The  sum  of  $1000  which  I  have  lent  you,  and  your  note  for 
$1000  which  I  now  have  in  my  possession  in  place  of  the 
money,  —  do  not  these  two  make  a  total  of  $2000  ? 

From  the  subjective  or  individual  point  of  view  the  note 
is,  in  fact,  capital ;  it  is  capital  for  me,  but  not  for  the  nation 
as  a  whole.  For  it  is  evident  that  I  cannot  negotiate  the 
paper  until  some  one  will  give  me  money  or  goods  in  ex- 
change for  it.  The  note  is  therefore  not  capital  per  se,  but 
simply  affords  me  the  possibility  of  obtaining  other  capital  in 
lieu  of  that  which  I  have  relinquished.  It  is  obvious,  more- 
over, that  whatever  may  be  the  use  to  which  I  want  to  devote 
the  value  represented  by  the  note, — whether  I  shall  use  it 
to  pay  my  living  expenses  or  use  it  for  production,  —  I  can 
do  this  only  by  converting  it  into  those  articles  of  consump- 
tion or  instruments  of  production  which  are  offered  for  sale. 
It  is  not  by  means  of  pieces  of  paper  that  I  shall  support 
life  or  carry  on  production,  but  with  the  aid  of  whatever 


CREDIT    HELPS   PRODUCTION  365 

tangible,  actual  wealth  I  can  procure  in  exchange  for  this 
paper.1 

Although  credit  cannot  be  called  productive  in  the  strict 
sense  of  creating  capital,  it  renders  eminent  services  to  pro- 
duction2 by  enabling  us  to  use  existing  capital  to  the  best 
possible  advantage. 

1  Mr.  Macleod  has  acquired  some  distinction  as  an  advocate  of  the  theory 
that  credit  instruments  are  real  wealth,  true  capital.     He  is,  it  must  be  ad- 
mitted, logical  in  his  reasoning ;  for  he  defines  wealth  as  "  everything  that 
has  exchange  value."     Credit  instruments  unquestionably  possess  exchange 
value,  and  would  therefore  fall  under  the  head  of  wealth.     But  his  defi- 
nition is  wrong.     If  every  credit  instrument   really   constituted  wealth,  it 
would  be  possible  to  double  the  wealth  of  any  community  by  simply  having 
each  citizen  lend  his  estate  to  his  neighbor  in  exchange  for  a  note. 

Mr.  Macleod  maintains  that  these  instruments  at  least  represent  future 
wealth.  This  is  true,  and  exactly  what  we  have  said  ;  but  the  very  fact  that 
they  are  future  wealth  makes  it  illegitimate  to  count  them  as  existing  wealth. 
When  they  have  become  present  wealth,  they  will  be  counted.  Until  then 
there  will  always  be  this  important  difference  between  present  and  future 
wealth :  the  former  exists,  whereas  the  latter  does  not  exist.  Men  live  and 
produce  by  means  of  present  wealth,  not  by  means  of  anticipated  wealth. 
To  reckon  future  wealth  as  part  of  a  nation's  riches  would  be  like  taking  a 
census  by  adding  to  the  present  population  those  persons  who  will  be  born 
twenty  years  hence,  —  on  the  ground  that  they  are  future  members  of  the 
community. 

Professor  Leroy-Beaulieu  remarks  that  Macleod's  theory  is  like  maintain- 
ing that  whenever  a  person  is  reflected  in  a  mirror,  there  are  two  persons 
instead  of  one. 

2  We  speak  advisedly  of  its  services  to  "production,"  because  credit  for 
consumption  ordinarily  has  disastrous  consequences.    Credit  for  consumption, 
however,  may  be  admitted  as  rendering  some  services,  such  as  :  (a)  helping 
us  to  tide  over  difficult  situations  while  awaiting  a  turn  of  fortune  ;  (6)  sim- 
plifying accounts  and  avoiding  very  frequent  payments  (for  example,  the 
daily  purchase  of  bread  "  on  credit "  at  the  baker's). 

Professor  Leroy-Beaulieu,  in  his  interesting  discussion  of  credit  (Vol.  Ill, 
page  374,  "  Economic  politique  "),  points  out  these  three  advantages  :  — 

(1)  The  transfer  of  capital  effected  by  credit  ordinarily  results  in  a  better 
use  of  this  capital  by  the  borrower  (and  by  society)  than  would  have  been 
made  by  the  lender. 

(2)  By  placing  capital  in  the  hands  of  those  persons  who  are  able  to  make 
a  better  use  of  it  than  those  who  accumulate  it  by  saving,  credit  enables  the 
former  to  give  the  latter,  in  return  for  the  relinquishment  of  their  funds,  a 
share  in  the  results  of  this  better  use  of  capital.     Thus  credit  makes  saving 
more  advantageous  and  contributes  to  the  growth  of  capital. 


366  PRINCIPLES   OF   POLITICAL   ECONOMY 

If  capital  could  not  be  transferred  from  one  person  to 
another,  and  if  everybody  were  reduced  to  the  necessity  of 
employing  his  own  capital,  and  only  his  own  capital,  an  enor- 
mous amount  of  wealth  would  remain  unused.  In  all  civil- 
ized societies  there  are  many  persons  who  cannot  make  use 
of  their  own  capital,  or,  at  least,  cannot  make  the  most 
profitable  use  of  it.  Among  these  persons  are  the  follow- 
ing:— 

(CL)  Those  who  have  too  much  capital.  As  soon  as  a  man's 
fortune  exceeds  a  certain  sum,  it  is  no  easy  matter  for  him 
to  make  the  best  use  of  it  by  his  own  ability  alone ;  usually, 
moreover,  the  possessor  of  a  very  large  amount  of  capital  is 
little  disposed  to  take  the  necessary  pains  to  make  the  most 
productive  use  of  it. 

(6)  Those  who  have  not  enough.  Laborers,  farmers,  and 
servants,  who  have  saved  small  sums  of  money,  would  be  at 
a  loss  how  to  employ  these  small  savings  productively.  But 
when  these  savings  are  united  they  amount  to  millions,  and 
permit  of  carrying  on  vast  productive  enterprises. 

(<?)  Those  who,  by  reason  of  their  age,  sex,  or  occupation, 
cannot  themselves  employ  their  capital  in  industrial  enter- 
prises. This  is  the  case  with  minors,  women,  and  persons 
who  are  engaged  in  the  liberal  professions,  —  lawyers,  physi- 
cians, military  men,  clergymen,  and  government  officials. 

On  the  other  hand  there  are  people  in  the  world  —  such  as 
"  captains  of  industry,"  inventors,  agriculturists,  even  work- 
men—  who  could  make  excellent  use  of  capital  if  they  pos- 
sessed it;  unfortunately,  they  are  sometimes  entirely  without 
it,  or  have  but  an  insufficient  quantity. 

Now  if,  by  means  of  credit,  capital  is  transferred  from 
those  who  can  not  or  will  not  make  the  best  use  of  it,  to 

those  who  are  capable  of  employing  it  productively,  this  is 

• 

(3)  By  substituting  simpler  methods  of  payment,  and  using  more  effective 
and  cheaper  kinds  of  capital  than  money,  credit  permits  of  transacting  a 
vaster  bulk  of  business  with  much  less  money.  As  money  is  a  costly  instru- 
ment of  exchange,  the  economy  of  money  permits  a  nation  to  increase  its 
productive  capital. 


THE   BANKING   BUSINESS  367 

of  great  benefit  for  all  persons  concerned,  and  for  the  whole 
community.  In  every  country  there  are  millions  of  dollars 
which  in  this  manner  are  withdrawn  from  mere  sterile  hoard- 
ing, or  from  unproductive  consumption,  and  made  productive 
by  means  of  credit.  It  has  been  well  said  that  credit  trans- 
forms latent  capital  into  active  capital.1 

In  the  following  sections  we  shall  consider  the  organiza- 
tion of  credit,  i.e.  the  institutions  and  arrangements  by 
means  of  which  credit  is  utilized. 

IV.   The  Function  of  Banks 

We  have  remarked  that  the  exchange  of  commodities  is 
almost  impossible  without  the  aid  of  certain  intermediaries, 
called  merchants  or  traders.  In  the  same  way,  trade  in 
credit  would  be  next  to  impossible  without  the  assistance  of 
intermediaries  called  bankers.* 

Bankers  are  like  all  other  merchants.  Ordinary  mer- 
chants buy  and  sell  goods;  bankers  deal  in  capital  repre- 
sented either  by  credit  instruments  or  by  money.  The 
former  buy  in  order  to  sell,  and  find  their  gain  in  buying  as 
cheaply  as  possible  and  selling  as  dearly  as  possible.  The 
latter  borrow  in  order  to  lend,  and  find  their  gain  in  borrow- 
ing at  as  low  a  rate  as  possible  and  lending  at  as  high  a  rate 
as  possible.  Borrowing  and  lending  are  the  two  funda- 
mental transactions  of  all  banking  business.  The  sums 
which  the  banks  borrow  are  usually  obtained  through 
deposits,  and  their  loans  are  usually  made  in  the  form  of 

1  It  may  be  said  that  credit  performs  the  same  part,  with  regard  to  capital, 
as  that  performed,  with  regard  to  wealth,  by  exchange.     We  have  noted  that 
exchange,  by  transferring  wealth  from  one  owner  to  another,  does  not  create 
wealth,  but  makes  it  possible  to  utilize  it  better,  and  to  make  better  use  of 
productive  labor. 

Credit  likewise  permits  the  economy  of  a  certain  amount  of  metallic 
money.  But  we  have  already  considered  this  function  of  credit,  and  we  shall 
again  speak  of  it  in  connection  with  bank  notes. 

2  A  bank  has  been  tersely  defined  as  "  a  manufactory  of  credit  and  a 
machine  of  exchange." 


368  PRINCIPLES    OF   POLITICAL   ECONOMY 

discount;  they  are,  therefore,  commonly  called  banks  of  de- 
posit and  discount.* 

There  is,  however,  a  third  transaction  quite  different  from 
the  other  two,  although  fundamentally  it  constitutes  a 
species  of  loan.  We  refer  to  the  issuing  of  notes.  This 
operation  is  not  essential  to  banks ;  often  it  is  an  excep- 
tional, privileged  function,  belonging  only  to  certain  banks 
known  as  banks  of  issue? 

Let  us  examine,  in  turn,  each  of  these  branches  of  the 
banking  business. 

V.   Deposits 

The  banker's  first  task  is  to  get  capital  from  others.  He 
can,  of  course,  use  his  own  capital  or  those  larger  sums  which 

1  The  history  of  banks  is  closely  connected  with  the  history  of  commerce 
since  the  Middle  Ages.    The  creation  of  each  great  bank  marks  a  new  stage  of 
commercial  development.     The  first  were  those  of  the  Italian  cities,  Venice 
(1400  ?)  and  Genoa  (1407).    Then  commercial  supremacy  passed  to  Holland, 
and  we  come  to  the  great  and  celebrated  Bank  of  Amsterdam  (1609),  soon 
followed  by  those  of  Hamburg  and  Rotterdam.     Finally,  the  creation  of  the 
Bank  of  England,  in  1694,  indicated  that  this  nation  was  about  to  take  the 
lead  in  commerce.    The  Bank  of  France  was  not  founded  until  the  beginning 
of  the  nineteenth  century,  although  Law  had  founded  a  bank  in  1716. 

2  Originally,  bankers  were  simply  money-changers.      In  London,  during 
the  seventeenth  century,   the  goldsmiths  took  charge  of  money-changing. 
But  whereas  money-changers  to-day  have  little  to  do  except  in  frontier  cities 
or  great  commercial  centres,  i.e.  in  such  places  as  are  frequented  by  foreign- 
ers, this  was  not  the  case  in  the  Middle  Ages.     The  innumerable  kinds  of 
money  resulting  from  the  right  of  feudal  lords  in  some  countries  to  coin  it, 
and  the  frequency  of  clandestine  debasement  or  counterfeiting  (not  infre- 
quently due  to  the  sovereign  himself),  made  the  business  of  these  changers, 
who,  for  a  premium,  would  furnish  good  money,  a  very  important  one. 

In  Holland,  where  international  trade  accumulated  money  from  all  coun- 
tries, merchants  found  it  advantageous  to  deposit  their  money  at  the  Bank  of 
Amsterdam,  which  guaranteed  them  the  same  weight  of  silver,  i.e.  the  same 
value,  as  that  deposited.  Accounts  were  kept  in  an  ideal  money  called  bank 
money.  For  these  reasons  a  claim  of  the  bank  was  always  worth  8  or  10 
per  cent  more  than  the  same  sum  in  current  money.  (See  Adam  Smith's 
celebrated  Chapter  3,  Book  IV,  on  this  subject.) 

The  first  banks  did  not  lend  money ;  they  were  banks  of  deposit,  but  not 
banks  of  discount.  In  1658,  however,  the  Bank  of  Sweden  issued  notes  pay- 
able on  demand. 


HOW    DOES    THE   BANKER    GET   MONEY?  369 

may  be  furnished  by  the  association  of  capital,  and  which, 
in  modern  society,  amount  to  hundreds  of  millions.  But  if 
the  banker  carries  on  his  business  only  with  his  own  private 
capital,  or  with  that  of  a  group  of  capitalists,  his  profits  will 
be  small  and  his  services  of  little  importance  to  society.  We 
shall  soon  see  the  reason  for  this.  The  banker,  therefore, 
must  carry  on  his  business  with  the  money  of  the  public,  and 
for  this  reason  is  obliged  to  borrow  it  from  the  public.1 

How  does  the  banker  borrow  this  money  from  the  public  ? 
Not  after  the  fashion  of  governments  or  municipalities  or 
business  establishments,  which  (in  the  guise  of  stock,  bonds, 
debentures,  shares)  borrow  for  long  periods  the  capital  that 
is  offered  for  investment.  Such  loans  as  these  involve  the 
payment  of  too  high  a  rate  of  interest.  What  the  banker 
tries  to  get  hold  of  is  the  circulating,  floating  capital  which, 
in  the  form  of  money,  people  carry  about  in  their  pockets  or 
keep  in  their  safes.  In  all  countries  there  is  a  large  amount 
of  capital  of  this  sort,  —  capital  that  is  not  fixed,  which  does 
nothing,  which  produces  nothing,  and  which  is  simply  kept 
in  readiness  for  the  time  when  it  shall  be  employed.  The 
banker  says  to  the  public :  "  Intrust  your  idle  funds  to  me 
until  you  have  found  some  employment  for  them.  I  will 
spare  you  the  trouble  of  taking  care  of  them  and  will  return 
them  as  soon  as  you  shall  have  need  of  them,  at  your  first 
requisition.  To  do  this  is  to  render  you  a  service.  I  will, 
moreover,  pay  a  low  rate  of  interest  for  your  money, — say 
2  or  3  per  cent.2  This,  at  all  events,  is  more  than  it 

1  Some  large  banks  never  employ  their  own  capital  in  their  transactions; 
they  invest  it  either  in  real  estate  or  in  stocks  and  bonds,  which  constitute  a 
reserve  or  a  guarantee  for  their  patrons.    This,  for  instance,  is  true  of  the 
Bank  of  France. 

Almost  all  of  the  capital  of  the  Bank  of  England  consists  of  government 
debts. 

2  Banks  that  receive  money  on  deposit  often  pay  no  interest  at  all  for 
deposits,  on  the  assumption  that  they  render  a  sufficient  service  by  storing 
the  money  safely.     Such  is  the  case  for  the  Bank  of  England  and  the  Bank 
of  France,  which,  nevertheless,  receive  vast  sums  on  deposit.     Formerly, 
banks  of  deposit,  such  as  those  old  banks  which  we  have  mentioned,  required 


370  PRINCIPLES   OF   POLITICAL   ECONOMY 

produces  for  you  while  in  your  own  possession.  I  will, 
finally,  render  you  the  additional  service  of  being  your 
treasurer,  collecting  your  income,  cashing  your  coupons,  and 
paying  your  creditors  in  accordance  with  your  instructions, 
—  all  of  which  will  save  you  considerable  inconvenience." 

Wherever  these  offers  are  heard  and  accepted  by  the 
public,  bankers  may  thus  obtain  a  large  amount  of  capital  on 
very  easy  terms  by  draining  from  circulation  the  coin  which  is 
scattered  about  the  country.  We  have  already  observed  that 
in  England,  for  instance,  it  is  customary  for  wealthy  people 
not  to  keep  any  money  in  their  homes,  but  to  deposit  it  all 
with  their  bankers.  The  same  is  true  to  some  extent  in  this 
country.  Whenever  a  person  has  to  pay  a  merchant  or  any 
other  creditor,  the  latter  is  simply  sent  to  the  bank  to  receive 
payment  upon  presenting  a  check  or  written  order  which  the 
debtor  has  detached  from  his  check-book.  This  method  of 
payment  is  now  becoming  universal. 

VI.    Discount 

When  this  floating  capital  has  been  borrowed  by  the  bank 
at  a  low  rate,  the  next  step  is  to  turn  it  to  account  by  lending 
it  to  the  public. 

How  shall  this  be  done  ?  The  banker  cannot  lend  the 
money  for  long  periods  ;  it  would  be  a  mistake  to  purchase 
mortgages  or  to  launch  industrial  enterprises.  He  must  bear 
in  mind  that  he  holds  this  capital  only  as  a  trust,  that  is  to 
say,  on  deposit ;  he  may  be  obliged  to  refund  it  at  a  moment's 
notice.  Consequently  he  can  lend  it  only  for  short  periods 
and  employ  it  for  short-time  transactions  that  deprive  him 

depositors  to  pay  for  the  keeping  of  money,  because  they  did  not  touch  the 
funds  in  their  keeping  and  hence  made  no  profit  on  deposits. 

But  to-day  all  banks  try  to  employ  productively  the  money  in  their  charge. 
Hence  most  of  them  grant  a  low  rate  of  interest  in  order  to  attract  deposits. 
They  sometimes  give  a  higher  rate  of  interest  when  the  depositor  binds 
himself  not  to  withdraw  his  money  except  after  giving  notice  to  that  effect 
six  months  or  a  year  or  five  years  in  advance. 


THE   NATURE   OF   DISCOUNTING  371 

of  its  control  for  only  a  little  while.  The  deposits  must  be 
kept,  so  to  speak,  within  easy  reach. 

Are  there  any  loan  transactions  which  fulfil  these  condi- 
tions ? 

There  is  one  variety  of  transaction  which  complies  with 
them  admirably.  When  a  merchant  has  sold  goods  on  credit, 
as  is  customary  in  modern  business,  and  happens  to  require 
money  before  the  time  for  payment  is  reached,  he  turns  to 
the  banker.  The  latter  will  advance  the  sum  that  is  due  for 
the  goods  sold,  minus  a  small  amount  which  constitutes  the 
banker's  profit  ;  thus  the  banker  acquires  the  merchant's 
claim  on  his  purchaser,  i.e.  his  bill  of  exchange  or  the  promis- 
sory note  obtained  from  his  debtor.  The  banker  keeps  this 
bill  or  note  until  the  time  when  it  falls  due,  whereupon  he 
collects  it  of  the  debtor.  In  this  manner  the  banker  recovers 
the  money  which  has  been  advanced. 

This  transaction  is  called  discounting.  It  is  a  form  of  loan. 
For  it  is  obvious  that  the  banker  who,  in  exchange  for  a  bill 
of  exchange  for  $1000,  payable  in  three  months,  advances 
1985  to  the  merchant,  and  collects  11000  when  the  bill  is 
due,  has  in  reality  lent  money  for  a  period  of  three  months 
or  less  at  the  rate  of  6  per  cent  or  more.  These  loans  are 
always  for  short  periods.  Bills  of  exchange  negotiated  by 
bankers  are  not  only  usually  payable  in  three  months  at  the 
outside,  but  it  is  generally  not  necessary  to  wait  even  that 
long  before  their  collection.  In  the  Bank  of  France,  for 
instance,  bills  of  exchange  are  kept,  on  the  average, 
twenty-seven  days  before  being  collected.  It  is  therefore 
only  for  a  very  short  period  that  the  banker  loses  possession 
of  the  money  he  has  received  on  deposit,  inasmuch  as  every 
dollar  returns  to  the  bank  within  a  few  weeks. 

Hence  it  is  apparent  that  so1  long  as  the  demands  for  the 
return  of  deposits  are  scattered  over  a  period  of  four  weeks, 
the  banker,  thanks  to  the  periodic  return  of  the  money 
advanced  to  borrowers,  will  always  be  able  to  meet  all  the 
demands  that  may  be  made  upon  him.  It  is  improbable  that 


372  PRINCIPLES   OF   POLITICAL  ECONOMY 

the  requests  to  refund  deposits  will  be  as  frequent  as  this,  at 
least  under  ordinary  circumstances.  It  would  therefore  be 
difficult  to  find  loan  transactions  better  adapted  to  the  needs 
of  banks  of  deposit. 

Nevertheless,  it  is  evident  that  in  periods  of  crisis  the 
banker  must  incur  considerable  risk.  If  all  the  depositors 
should  hurry  to  the  bank  on  one  and  the  same  day  and  claim 
their  money,  the  bank  would  surely  be  unable  to  meet  their 
demands,  because  its  money,  or  rather  their  money,  is  being 
used  outside  in  the  business  world.  It  will  of  course  soon 
be  returned,  but  there  is  always  this  difference  between  the 
money  borrowed  by  the  bank  and  the  money  lent  by  it:  the 
former  is  payable  on  demand ',  whereas  the  latter  usually  can 
be  claimed  only  after  a  certain  period  has  elapsed;1  and  there 
are  times  when  this  difference  may  lead  to  bankruptcy. 

But  is  this  problematical  danger  a  sufficient  reason  for  not 
permitting  banks  to  make  use  of  their  deposits,  and  for 
obliging  them  to  keep  intact  the  money  that  is  intrusted  to 
them,  after  the  manner  of  the  old  banks  of  Venice  and 
Amsterdam  ?  Certainly  not.  For  if  that  were  done,  all  par- 
ties concerned  would  be  greatly  inconvenienced  and  highly 
dissatisfied. 

First,  the  depositors  themselves  would  object ;  for  it  is 
clear  that,  if  the  bank  is  compelled  to  keep  their  money  in 
its  vaults  without  employing  it,  the  bank  could  not  possibly 
pay  interest  on  deposits,  but,  on  the  contrary,  would  be  com- 
pelled to  require  payment  to  cover  the  cost  of  keeping. 
Hence  it  is  better  for  the  depositors  to  run  the  risk  of  having 

1  In  large  commercial  centres  bankers  frequently  lend  considerable  sums 
on  condition  that  they  be  returned  on  demand.  The  reserve  of  a  bank  con- 
sists of  two  elements :  one  representing  the  cash  needed  in  the  everyday 
transactions  of  its  customers,  and  the  other  an  amount  retained  as  a  means 
of  safety  and  used  to  meet  unforeseeable  and  irregular  demands.  This  latter 
fund  cannot  be  safely  invested  even  in  bills,  unless  it  is  very  large,  and  the 
business  of  the  bank's  customers  is  of  an  unusually  certain  character.  It  is 
therefore  put  out  on  what  are  known  as  "call  loans."  (See  W.  A.  Scott, 
"Money  and  Banking,"  New  York,  1903.) 


THE    BANK    RESERVE  373 

to  wait  a  few  days  for  reimbursement,  than  to  hoard  their 
money  at  home  unproductively,  or  to  be  obliged  to  pay  for 
its  safe-keeping. 

Society,  too,  would  object ;  for  the  social  utility  of  banks 
consists  in  combining  scattered  and  unproductive  capital 
(existing  in  the  form  of  coin)  and  making  it  active  and  pro- 
ductive. This  function  evidently  is  impossible  the  moment 
that  banks  are  unable  to  employ  deposits. 

Hence  banks  do  not  hesitate  to  make  use  of  the  sums  con- 
fided to  their  charge.  But  in  order  to  face  any  demands 
which  may  arise,  they  take  care  always  to  have  a  certain  cash 
reserve  on  hand.  It  is  impossible  to  establish  a  priori  the 
ratio  of  deposits  to  the  cash  reserve,  but  it  has  been  found 
by  long  experience  that  a  reserve  of  from  15  to  25  per  cent 
of  the  deposit  is  sufficient  to  meet  all  demands  which 
depositors  are  likely  to  make  at  one  time.  (See  the  section 
on  the  Organization  of  Banks.)  A  bank's  reserve  should  be 
larger  whenever  its  credit  is  poor  or  whenever,  it  has  many 
large  depositors  ;  it  should  strengthen  its  reserve  particu- 
larly during  commercial  crises  and  on  the  advent  of  new 
issues  of  government  bonds,  —  that  is  to  say,  at  such  times 
when  it  can  foresee  that  many  depositors  will  be  likely 
to  want  their  money. 

It  must  not  be  supposed,  however,  that  all  the  bank 
deposits  are  in  cash.  The  term  deposits  is  applied  indif- 
ferently to  credit  balances  originating  in  deposits  of  money 
or  to  those  having  their  origin  in  the  discounting  of  notes, 
and  may,  therefore,  be  defined  as  the  aggregate  amounts 
standing  to  the  credit  of  customers  on  the  bank's  books. 
When,  for  example,  a  business  man  wants  a  note  dis- 
counted, he  is,  theoretically,  entitled  to  receive  cash  at 
once.  But  if  he  asked  for  cash  at  once  in  full,  the  bank 
would  not  be  likely  to  discount  notes  for  him  in  the  future. 
Usually,  the  business  man  does  not  require  cash.  What 
he  wants  is  a  certain  amount  of  purchasing  power  in  avail- 
able form.  The  proceeds  of  the  discounted  note  are  simply 


374  PRINCIPLES    OF    POLITICAL    ECONOMY 

placed  to  his  credit  to  be  drawn  out  by  him  at  such  times 
and  in  such  amounts  as  convenience  or  necessity  may  dic- 
tate. The  sum  which  he  is  thus  at  any  time  entitled  to 
draw,  so  long  as  it  stands  to  his  credit,  is  said  to  be  de- 
posited in  the  bank.  But  the  bank  is  reasonably  sure  that 
the  total  amounts  drawn  in  a  single  day  upon  such  accounts 
as  these  will  form  but  a  small  fraction  of  its  whole 
deposits.1 

Discounting  is  not  the  sole  manner  in  which  banks  may 
employ  their  funds.  They  also  lend  money  in  these  ways  :  — 

(a)  By  making  advances  on  securities.  When  this  is  done, 
bankers  are  careful  that  the  sum  lent  is  sufficiently  lower 
than  the  value  of  the  security. 

(6)  By  granting  an  open  credit  to  their  customers,  who  are 
thus  entitled  to  withdraw  more  money  than  they  have  depos- 
ited. Obviously,  this  amounts  to  the  same  thing  as  lending 
them  money.  But  as  such  loans  —  called  uncovered  loans  or 
overdrafts  —  are  exceedingly  risky  and  are  made  practically 
without  security,  many  banks  refuse  to  transact  them.2 

1  See  C.  F.  Dunbar,  "  The  Theory  and  History  of  Banking,"  and  W.  A. 
Scott,  "Money   and   Banking."      Claims  to  deposits  and  national  bank 
notes    are    usually  designated    as    "bank    currency"    and  constitute   the 
greater  part  of  the  total  volume  of  currency.     On  July  1,  1900,  there  were 
in  circulation  over  $300,000,000  national  bank  notes,  and  the  bank  deposits 
amounted  to  over  $4,000,000,000.      All  other  forms  of  currency  combined 
amounted  to  only  $1,762,000,000. 

2  A  multitude  of  technical  terms  are  employed  in  the  banking  business. 
Some  of  these  deserve  brief  explanations. 

Promissory  notes  are  sometimes  made  out  for  future  or  fictitious  transac- 
tions, and  do  not  have  their  origin  in  any  business  transaction  already  con- 
cluded. In  this  case  they  are  called  accommodation  bills. 

Some  banks,  especially  in  Scotland,  authorize  persons  to  draw  a  maximum 
amount  of  money  from  the  bank  within  a  given  time,  and  returnable  within 
a  given  time,  interest  to  be  paid  only  for  the  amount  actually  drawn  and  the 
time  it  is  kept  out.  These  are  loans  on  personal  security,  never  less  than 
two  names  being  required,  and  are  called  cash  credits. 

Bills  of  exchange  or  drafts  are  sometimes  accompanied  by  bills  of  lading, 
warehouse  receipts,  stocks,  or  bonds,  which  are  specific  titles  to'  property, 
the  bank  having  a  lien  on  the  property  until  the  bill  is  paid.  These  are 


BANK   NOTES  375 


VII.  The  Issue  of  Bank  Notes 

The  interest  of  a  banker,  like  that  of  every  other  business 
man,  is  to  increase  the  extent  of  his  transactions  so  far  as 
possible.  Twice  as  much  business  means  twice  as  much 
profit.  But  how  can  a  banker  extend  the  scope  of  his  trans- 
actions ? 

If  it  were  possible  for  him  really  to  create  capital,  in  the 
form  of  coin,  instead  of  being  obliged  to  wait  patiently  until 
the  public  is  willing  to  bring  it  to  him,  this  would  manifestly 
be  an  exceedingly  desirable  achievement  so  far  as  he  is  con- 
cerned. And  bankers  have  indeed  conceived  the  ingenious 
idea  of  actually  creating  the  capital  they  need,  by  issuing 
simple  promises  to  pay,  i.e.  by  issuing  bank  notes ;  and  ex- 
perience has  demonstrated  that  the  process  is  perfectly  prac- 
ticable.1 It  has  succeeded  admirably. 

exceptionally  secure  bills  and  command  a  lower  rate  of  interest  than  is 
usually  paid. 

Letters  of  credit  are  instruments  of  writing  issued  by  a  bank,  authorizing 
the  holder  to  draw  upon  the  issuing  bank  or  upon  some  affiliated  institution, 
at  sight  or  otherwise,  and  within  a  definite  period,  a  sum  or  sums  of  money 
not  exceeding  a  specified  aggregate  amount.  The  letter  always  indicates  how 
much  has  been  drawn,  and  how  much  credit  remains  unexhausted.  It  also 
bears  the  names  of  the  banks  or  persons  in  various  parts  of  the  world  who 
will  honor  any  requests  made  by  the  owner — up  to  the  total  amount  of  the 
letter.  A  large  part  of  the  foreign  purchases  made  by  merchants  is  effected 
through  bills  of  exchange  drawn  under  letters  of  credit.  These  letters  are 
also  much  used  by  tourists  to  pay  their  travelling  expenses.  (See  Horace 
White,  "Money  and  Banking.") 

1  The  invention  of  bank  notes  is  attributed  to  Palmstruch,  the  founder  of 
the  Bank  of  Stockholm  (1656). 

The  early  bankers  of  Italy  and  Amsterdam,  and  the  London  goldsmiths, 
issued  notes  in  the  seventeenth  century  ;  but  these  notes  represented  simply 
the  money  which  they  had  in  their  vaults,  —they  were  merely  receipts  for 
deposits  and  not  really  bank  notes. 

As  the  deposit  business  of  bankers  and  goldsmiths  grew,  and  the  quantity 
of  notes  called  for  by  depositors  increased,  it  became  more  convenient  to  print 
blank  forms,  to  be  filled  out  with  the  names  of  the  depositors  and  of  the 
amounts  due  them.  Still  later  notes  were  printed  for  round  sums,  — as,  for 
example,  five  or  ten  pounds, — which  could  be  handed  in  quantities  to  the 


376  PRINCIPLES   OF   POLITICAL   ECONOMY 

In  exchange  for  the  negotiable  paper  which  is  presented 
for  discount,  the  banks,  instead  of  paying  in  money,  give 
their  notes.  That  the  public  accepts  this  arrangement  may 
cause  some  surprise.  Here,  for  example,  is  a  business  man 
who  comes  to  the  bank  to  "  sell "  a  bill  of  exchange  for 
$1000,  and  in  return  for  it  he  receives  other  credit  instru- 
ments, namely,  bank-notes  for  the  same  sum  minus  the  dis- 
count. "  What  use  is  this  to  me  ?  "  he  may  inquire.  "  I 
want  money,  not  instruments  of  credit ;  else  I  might  just  as 
well  have  kept  the  bill  of  exchange  with  which  I  came." 
But  let  him  reflect  a  moment.  Although  the  bank  note  is 
only  an  instrument  of  credit,  like  a  bill  of  exchange  or  a 
promissory  note,  yet  it  represents  a  far  more  convenient 
kind  of  credit  claim.  It  is,  in  fact,  superior  to  most  credit 
papers  for  these  reasons  :  — 

(1)  It  is  transferable  to  bearer,  just  like  coin,  whereas  a  bill 
of  exchange  is  subject  to  the  formality  and  the  responsibilities 
of  indorsement. 

(2)  It  is  payable  at  sight,  i.e.  at  any  time  whatever,  whereas 
commercial  paper  is  payable  only  at  a  specified  date. 

(3)  It  is  always  payable  on  demand,   whereas  negotiable 
paper  may  lose  its  value   at   the   expiration  of   a   certain 
period. 

(4)  A  bank  note  is  always  for  a  round  sum,  such  as  is  cus- 
tomary in  the  prevailing  monetary  system,  —  like  $10,  $20, 
or  $100,  —  whereas  commercial   paper,  being  the  result  of 
commercial  transactions,  often  has  a  fractional  value. 

persons  entitled  to  receive  them  ;  and  these  were  made  payable  to  bearer,  or 
to  order,  according  to  the  wish  of  the  depositor.  When  the  business  of  dis- 
counting commercial  paper  was  added  to  the  goldsmith's  vocation,  the  notes 
were  issued,  if  desired,  to  the  persons  getting  the  discounts. 

Thus  the  right  to  issue  such  notes  became  recognized  as  a  right  at  common 
law.  Anybody  could  issue  them  and  put  them  in  circulation,  if  people  were 
willing  to  take  them.  Certain  charters  granted  to  banks  in  Philadelphia  and 
New  York  before  the  adoption  of  the  federal  Constitution  contained  no  men- 
tion of  circulating  notes,  since  the  right  to  issue  them  existed  without  legis- 
lative authorization.  The  Bank  of  New  York  issued  circulating  notes  seven 
years  before  it  received  a  charter.  (See  Horace  White,  "  Money  and  Bank- 
ing," Boston,  1902.) 


CONVENIENCE   OF   THE   BANK   NOTE  377 

(5)  It  is  issued  and  signed  by  a  well  known  institution,  the 
name  of  which  is  familiar  to  the  public,  whereas  the  signers 
of  a  bill  of  exchange  or  a  promissory  note  are  often  known 
only  to  the  persons  that  have  business  relations  with  them.1 

(6)  Finally,  it  yields  no  interest,  and  is  in  this  respect  like 
a  coin,  whereas  all  other  credit  paper  yields  interest.     This 
must  not  be  regarded  as  a  sign  of  inferiority,  —  far  from  it,  — 
but  as  making  the  bank  note  more  closely  similar  to  money, 
inasmuch  as  its  value  always  remains  the  same  and  is  not  sub- 
ject to  variations  according  to  the  proximity  or  remoteness 
of  the  day  upon  which  it  falls  due. 

The  above  considerations  lead  the  public  to  accept  a  bank 
note  quite  as  readily  as  metallic  money;  bank  notes  are 
fiduciary  paper  money.  (See  page  259.) 

It  goes  without  saying  that  banks  derive  great  benefit  from 
the  emission  of  notes.  It  provides  them,  on  the  one  hand, 
with  the  resources  necessary  for  extending  their  transactions, 
—  within  limits  dictated  by  prudence  and  which  we  shall 
examine  presently.  On  the  other  hand,  the  capital  which 
they  obtain  by  means  of  notes  is  far  more  profitable  to  them 
than  what  they  receive  in  the  form  of  deposits.  Deposits,  as 
we  have  seen,  generally  cost  the  banks  2  or  3  per  cent  interest, 
whereas  bank  notes  cost  merely  the  expense  of  manufacture, 
which  is  insignificant. 

But  we  must  not  conceal  the  fact  that  although  this  trans- 
action may  give  splendid  returns  to  the  bankers,  it  may  also 
give  rise  to  serious  dangers.  The  sum  total  of  bank  notes  in 
circulation,  which  may  at  any  time  be  presented  for  reim- 
bursement in  coin,  represents  a  debt  that  is  payable  on 
demand,  precisely  like  deposits.  The  bank,  consequently, 
is  exposed  to  a  twofold  peril :  it  may  be  called  upon  at  any 
time  to  refund  its  deposits  and  to  cash  its  notes. 

The  necessity  of  a  cash  reserve  exists  even  when  the  bank 

1  The  discount  of  commercial  paper  by  the  banks  which  give  their  notes 
in  return  for  this  paper  has  been  aptly  defined  as  "swapping  well  known 
credit  for  less  known  credit.1' 


378  PRINCIPLES   OF   POLITICAL   ECONOMY 

has  to  meet  only  the  demand  for  its  deposits  ;  it  is  still  more 
imperative  when  the  bank  adds  the  debt  resulting  from  its 
circulation  of  notes  to  that  which  results  from  its  deposits. 
Hence  we  can  understand  why  the  law  of  several  countries 
obliges  banks  of  issue  always  to  keep  a  certain  reserve.1 

Unfortunately,  as  the  money  which  lies  unused  in  vaults 
gives  no  returns,  the  self-interest  of  the  banks  prompts  them 
to  reduce  their  reserves  to  a  minimum;  and  it  is  difficult 
for  them  to  resist  this  temptation. 

VIII.   Differences  between  Bank  Notes  and  Paper  Money 

So  closely  do  bank  notes  and  paper  money  resemble  each 
other  that  the  public  scarcely  understands  the  distinction. 
Both  of  them  take  the  place  of  money.  In  France  and  in 
England,  bank  notes  are  even  legal  tender.  Yet  bank  notes 
differ  from  paper  money  issued  by  the  government,  and  are 
superior  to  it,  because  of  three  characteristics  :  — 

(1)  It  is  a  matter  of  principle  that  bank  notes  should 
always  be  convertible,  i.e.  payable  in  specie  at  the  will  of  the 
holder  ;  whereas  paper  money  is  not.     The  latter,  to  be  sure, 
has   the   appearance  of  a   promise  to  pay  a  certain  sum  of 
money,  and  as  a  matter  of  fact  the  holder  may  entertain  the 
hope  that  some  day  the  government,  when  it  is  better  off 
financially,  will  exchange  the  paper  for  coin.     Since  1879, 
our   own    greenbacks   have   been    regarded   as   convertible, 
although  the  government  would  find  it  impossible  to  redeem 
them  all  at  once.     Yet  the  question  when  the  government 
will  convert  its  paper  money  into  coin  does  not  greatly  concern 
those  who  receive  it,  for  they  have  no  intention  of  keeping 
it.     (Seepage  261.) 

(2)  Bank   notes  are   issued   in  the  course  of  commercial 
transactions,  and  only  to  the  extent  required  by  these  trans- 
actions ;    whereas  the  issue   of   paper  money  by  the   gov- 

1  In  Germany  and  in  Belgium  the  law  fixes  the  ratio  at  one- third  of  the 
amount  of  notes  in  circulation. 


BANK   NOTES   AND   PAPER   MONEY  379 

eminent  is  for  the  purpose  of  meeting  its  expenses,  and 
has  no  other  limits  than  the  financial  necessities  of  the 
moment. 

(3)  As  the  name  indicates,  bank  notes  are  issued  by  a 
bank,  i.e.  by  a  corporation  whose  principal  object  is  to  carry 
on  business  and  whose  principal  care  is  to  safeguard  its 
credit  ;  whereas  paper  money  is  always  issued  by  a  govern- 
ment. 

For  these  reasons  bank  notes  should  not  be  confounded 
with  paper  money.  It  may  happen,  however,  that  bank 
notes  approach  very  closely  to  paper  money  by  losing  one  or 
more  of  the  characteristics  mentioned  above. 

(A)  It  is  possible,  first  of  all,  for  bank  notes  to  acquire 
forced  circulation,  that  is  to  say,  to  cease,  for  a  time,  to  be 
convertible  in  money.      This  has   often  happened,  during 
crises,  to  the   notes  of   nearly  all  the  great  banks  of   the 
world.1 

Even  in  this  case  there  still  remain,  as  we  have  seen,  two 
other  differences  between  bank  notes  and  paper  money,  the 
more  important  of  which  is  this:  the  quantity  issued  is 
neither  unlimited  nor  fixed  arbitrarily,  but  is  always  deter- 
mined by  the  actual  necessities  of  business.  This  is  an 
excellent  guarantee  against  excessive  issues. 

(B)  It  may  happen,  however,  that  bank  notes  not  only 
acquire  forced  circulation,  but  that,  instead  of  being  put 
into  circulation  in  the  course  of   commercial  transactions, 
they  are  issued  merely  for  making  loans  to  the  government 
and  enabling  it  to  pay  its  expenses. 

In  such  a  case,  usually,  the  government  which  needs  money 
says  to  the  bank,  "Make  a  few  score  million  dollars'  worth 

1  We  must  be  careful  not  to  confound  legal  tender  with  forced  circulation. 
A  note  is  legal  tender  when  creditors  or  merchants  cannot  refuse  to  accept  it 
in  payment  for  debts  or  goods.  A  note  has  forced  circulation  when  the 
holder  cannot  convert  it,  i.e.  cannot  exchange  it  at  the  bank  for  coin.  It 
may  happen  that  bank  money  is  not  legal  tender,  and  yet  acquires  forced 
circulation  because  creditors  are  practically  obliged  to  receive  it. 


380  PRINCIPLES    OF   POLITICAL    ECONOMY 

of  notes,  lend  them  to  me,  and  I  will  protect  you  from  loss 
by  forcing  their  circulation."1 

In  this  event,  the  second  guarantee  likewise  disappears. 
The  issue  of  notes  then  has  no  other  limit  than  the  needs 
of  the  government,  and  under  such  circumstances  we  must 
admit  that  bank  notes  are  entirely  like  paper  money. 

Yet  even  in  this  case  the  third  guarantee  still  subsists, 
namely,  the  definite  identity  of  the  corporation  issuing  the 
notes.  This  of  itself  is  still  sufficient  to  make  bank  notes 
much  less  subject  to  depreciation  than  paper  money.  So 
thoroughly  has  experience  proved  this,  that  many  govern- 
ments do  not  now  exercise  the  right  to  issue  money  directly, 
but  have  recourse  to  the  intermediary  services  of  banks. 
The  public  takes  it  for  granted  that  banks  will  oppose  the 
issue  of  excessive  quantities  of  notes,  even  though  the  gov- 
ernment should  desire  it ;  for  the  issue  of  too  large  a  quan- 
tity of  notes  may  ruin  a  bank.  Hence  the  public  believes, 
—  and  unfortunately  its  belief  is  not  without  foundation,  — 
that  a  private  corporation  can  and  will  take  care  of  its  own 
interests  much  better  than  the  government  looks  after  the 
interests  of  the  general  public. 

IX.   The  Rate  of  Exchange 

The  portfolios  of  all  great  banking  institutions,  especially  of 
those  which  transact  business  with  foreign  countries,  contain 
quantities  of  bills  of  exchange  payable  in  various  parts  of 
the  world.  These  represent  goods  worth  many  millions 
of  dollars,  and  constitute  the  staple  of  a  very  active  and 
important  business.  They  are  designated  as  "paper  on 
London,"  "paper  on  Paris,"  etc.,  according  to  the  place 
at  which  they  are  made  payable. 

The  bankers  who  deal  in  them  are  obviously  nothing  but 

1  This  is  just  what  took  place  in  France  during  the  Franco-Prussian  War 
in  1870.  The  government  repeatedly  borrowed  from  the  Bank  of  France, 
until  the  total  sum  reached  1,470,000,000  francs.  But  in  order  to  do  this 
successfully  it  was  first  necessary  to  give  the  notes  forced  circulation. 


TRADE   IN   BILLS   OF   EXCHANGE  381 

middlemen,  commercial  intermediaries.  Hence  we  must 
inquire :  From  whom  is  this  commodity,  called  commercial 
paper,  purchased,  and  to  whom  is  it  sold? 

First  of  all,  Where  do  they  get  it?  They  buy  it  of 
persons  who  produce  it,  of  all  those  who  are  creditors  of 
foreigners,  and  especially  from  American  merchants  or  pro- 
ducers who  have  sold  goods  abroad,  and  who,  as  a  result  of 
their  sales  abroad,  have  drawn  bills  of  exchange  on  their 
debtors  in  London,  Paris,  or  Berlin.  Should  it  happen  that 
the  American  creditor  needs  money  before  the  bill  falls  due, 
or  simply  because  he  finds  it  inconvenient  to  send  the  bill 
abroad  for  collection,  he  will  sell  the  bill  to  his  banker ;  that 
is  to  say,  he  will  have  his  banker  discount  it. 

To  whom  do  the  bankers  sell  these  bills  ?  To  the  many 
persons  who  are  in  quest  of  them.  Bills  of  exchange  are 
eagerly  sought  by  all  those  who  have  payments  to  make  in 
foreign  countries,  particularly  by  American  merchants  or  con- 
sumers who  have  purchased  goods  abroad.  If  the  American 
purchaser,  for  instance,  cannot  induce  his  English  creditor 
to  draw  a  bill  of  exchange  payable  in  this  country,  he  is 
obliged  to  send  abroad  to  the  home  of  his  creditor  the  pre- 
cise amount  due  in  pounds,  shillings,  and  pence.  To  do  this 
is  exceedingly  inconvenient.  But  if  the  purchaser  can  find 
bills  of  exchange  payable  at  the  place  where  his  creditor 
lives,  he  thus  has  a  more  convenient  and  less  expensive 
method  of  payment.  (See  page  282.) 

It  would  appear  that  this  commercial  paper  should  be  sold 
("negotiated")  for  a  price  that  is  equal  to  the  sum  of  money 
which  it  represents.  Thus  a  bill  of  exchange  for  $100 
ought  to  be  worth  f  100,  —  no  more  and  no  less.  Yet  this  is 
not  the  case.  It  goes  without  saying  that  the  degree  of 
confidence  which  can  be  placed  in  the  debtor,  and  the  period 
of  time  which  must  elapse  before  the  bill  is  due,  affect  the 
value  of  the  bill.  But  aside  from  these  self-evident  causes 
of  fluctuation,  even  though  the  bill  is  perfectly  reliable  and 
payable  at  sight,  still  its  value,  like  the  value  of  any  other 


382  PRINCIPLES   OF  POLITICAL  ECONOMY 

commodity,  varies  from  day  to  day  according  to  changes  in 
the  demand  and  the  supply.  These  variations  constitute  what 
is  called  the  rate  of  exchange,  and  are  stated  in  the  news- 
papers as  regularly  as  the  stock  quotations. 

We  can  readily  understand  what  is  meant  by  demand  and 
supply  as  applied  to  bills  of  exchange.  Let  us  suppose  that  our 
credits  abroad,  that  is  to  say  our  claims  on  foreign  countries 
due  to  exports  or  other  causes,  amount  to  1300,000,000.  Let 
us  further  suppose  that  our  debits  abroad,  that  is  to  say  the 
claims  which  foreign  countries  have  against  us  because  of 
our  imports  or  other  causes,  amount  to  $400,000,000.  In 
this  case  it  is  certain  that  there  is  not  enough  commercial 
paper  for  all  those  who  want  it,  inasmuch  as  the  total  supply 
does  not  exceed  $300,000,000,  and  the  demand  amounts  to 
$400,000,000.  Hence  all  those  who  require  bills  of  exchange 
to  pay  their  debts  bid  against  each  other,  and  foreign  bills 
of  exchange  rise  in  value;  that  is  to  say,  a  bill  for  $1000, 
payable  at  Berlin  or  Paris,  sells  not  for  $1000  but  perhaps 
for  $1002  or  for  $1005.  Such  paper  is,  as  the  term  goes, 
above  par;  it  rises  to  a  premium. 

Conversely,  when  the  claims  of  the  United  States  against 
foreign  countries  amount  to  $400,000,000,  whereas  the  debts 
we  owe  abroad  amount  to  only  $300,000,000,  it  is  certain  that 
paper  is  superabundant,  as  there  is  $400,000,000  of  it  for 
sale,  and  the  payment  of  our  debts  requires  only  $300,000,- 
000.  Many  bills  therefore  find  no  purchasers  and  can  be 
utilized  only  by  sending  them  abroad  for  collection.  Hence 
bankers  strive  to  dispose  of  them  by  selling  them  at  a  price 
somewhat  lower  than  their  face  value.  Thus  a  bill  for  $1000 
on  Paris  sells  perhaps  for  $995;  i.e.  it  falls  below  par. 

Whenever  in  any  country  paper  payable  abroad  is  quoted 
above  par,  the  rate  of  exchange  is  said  to  be  unfavorable  to 
that  country.  What  does  this  expression  mean  ?  Does  it 
signify  that  the  rate  of  exchange  is  unfavorable  to  those 
that  buy  exchange  ?  This  may  be  true ;  but  if  the  expres- 
sion meant  simply  this,  would  it  not  be  necessary  to  add  the 


THE  MEANING  OF  THE  RATE  OF  EXCHANGE    383 

converse  statement,  that  the  rate  is  favorable  to  those  that 
sell  exchange  ?  What  the  term  really  means  is  that  under 
these  conditions  the  rate  of  exchange  shows  that  the  claims 
which  this  country  has  against  foreign  countries  are  not  suf- 
ficient to  counterbalance  our  debts  to  foreign  countries,  and 
that  consequently  we  are  obliged  to  send  a  certain  quantity  of 
money  abroad  to  balance  accounts.  The  rise  of  the  rate  of 
exchange,  otherwise  called  dearness  of  paper  payable  abroad, 
is  an  infallible  premonitory  sign  of  the  exportation  of  coin, 
for  which  reason  we  speak,  in  this  case,  of  an  "  unfavorable 
rate  of  exchange."  Conversely,  whenever  in  this  country 
foreign  paper  is  quoted  below  par,  we  say  that  the  rate  of 
exchange  is  favorable.  The  process  of  reasoning  is  in  this 
case  precisely  similar;  a  fall  in  the  price  of  foreign  exchange 
indicates  that  when  all  reckonings  are  made  the  balance  of 
accounts  will  be  in  our  favor  and  we  must  therefore  expect 
the  importation  of  coin. 

To  be  sure,  we  must  not  attach  too  much  importance  to 
the  expressions  "  favorable  "  and  "  unfavorable  "  rates  of  ex- 
change. We  know  that  for  a  nation  to  send  money  abroad 
or  to  receive  it  from  other  countries  constitutes  neither  a 
great  danger  nor  a  great  advantage,  and  that  in  any  case  it 
is  not  likely  to  last  long.  (See  page  299.)  But  from  the 
banker's  point  of  view  this  situation  is  of  very  great  impor- 
tance ;  for  if  money  must  be  sent  abroad  it  will  probably  be 
taken  from  the  banks.  All  the  premonitory  signs,  therefore, 
are  of  capital  importance  to  bankers,  who  always  watch  the 
rate  of  exchange  intently,  as  the  sailor  who  fears  a  storm 
watches  the  barometer.  (See  the  section  on  A  Rise  in  the 
Rate  of  Discount.) 

We  must  observe,  however,  that  variations  in  the  price  of 
exchange  are  confined  to  narrower  limits  than  the  price  of 
any  ordinary  commodity.  During  normal  periods  (aside 
from  the  exceptions  which  we  shall  point  out  presently),  the 
rate  of  exchange  is  not  likely  to  be  very  much  above  or  very 
much  below  par.  This  is  due  to  two  causes. 


384  PRINCIPLES   OF   POLITICAL   ECONOMY 

(1)  Let  us  ask,  first  of  all,  why  does  the  American  busi- 
ness man  who  owes  money  abroad  seek  bills  of  exchange  ? 
Merely  because  he  wants  to  save  the  expense  of  shipping 
coin  and  converting  American  money  into  foreign  money. 
But  it  is  obvious  that  if  the  premium  which  he  is  obliged  to 
pay  for  foreign  exchange  is  higher  than  the  cost  of  shipping 
and  converting  coin,  there  will  be  no  inducement  for  him  to 
buy  exchange.     The  merchant,  moreover,  who  is  a  creditor 
of  foreigners,  and  the  banker  who  acts  as  his  intermediary, 
seek  to  negotiate  these  bills  of  exchange  only  to  avoid  the 
trouble  and  expense  of  collecting  them  abroad  and  importing 
the  coin.     Rather  than  sell  these  bills  at  too  low  a  price,  the 
merchant  or  banker  will  surely  adopt  the  latter  method  of 
obtaining  his  money.1     Inasmuch,  therefore,  as  the  trade  in 
foreign  exchange  has  no  other  purpose  than  to  economize  the 
cost  of  shipping  and  changing  money,  we  can  readily  under- 
stand that  the  traffic  will  cease  whenever  it  becomes  more 
expensive  for  the  persons  concerned  than  the  direct  shipment 
of  coin,  i.e.  whenever  the  variations  in  the  price  of  exchange, 
above  or  below  par,  exceed  the  cost  of  carriage.    As  the  cost 
of  carriage,  including  insurance,  is  very  small,  fluctuations  in 
the  rate  of  exchange  will  be  confined  within  rather  narrow 
limits. 

(2)  But  these  fluctuations  are  limited  by  another  influ- 
ence which  is  both  more  remote  and  more  subtle,  and  to 
which   we    referred   when    discussing    international    trade. 
(See  page  299.)     Let  us  suppose  that  the  price  of  foreign 

1  A  pound  sterling,  for  instance,  is  worth  $4.866+  in  our  gold  coin,  and  a 
bill  of  exchange  for  a  pound  is  therefore  at  par  when  it  sells  for  this  amount. 
The  price  cannot  go  up  beyond  about  $4.89,  which  is  called  the  "shipping- 
point."  To  send  $4.86  to  London,  about  2J  cents  is  charged  for  brokerage, 
insurance,  and  freight.  Therefore  the  American  debtor  who  wants  to  send  a 
pound  sterling  to  his  creditor  in  London  will  not  pay  more  for  a  paper  title 
to  a  pound  sterling  than  he  would  have  to  pay  to  send  this  amount  abroad. 
When,  on  the  other  hand,  the  price  of  exchange  falls,  it  cannot  go  below 
about  .$4.84  ;  for  if  it  does,  gold  will  be  imported.  Hence  $4.84  is  called  the 
"  importing-point." 


EFFECT    OF   THE   RATE    ON   FOREIGN    COMMERCE        385 

bills  of  exchange  rises  above  par,  and  that  the  merchant  who 
has  drawn  a  bill  for  $  1000  upon  his  foreign  debtor  can  sell 
this  bill  for  $1010.  It  is  then  evident  that  this  premium  of 
110  is  added  to  the  profits  of  the  transaction.  Instead 
of  making  a  profit,  let  us  say,  of  10  per  cent,  he  gets  11  per 
cent.  This  increase  in  the  earnings  of  all  those  who  have 
sold  goods  abroad  will  lead  a  large  number  of  dealers  to  fol- 
low their  example  ;  in  other  words,  a  rise  in  the  rate  of 
exchange  acts  as  a  premium  on  exports.1 

But  the  increase  of  exports  will  give  rise  to  an  increase  in 
the  amount  of  bills  of  exchange,  and  consequently  the  value 
of  these  bills,  according  to  the  general  law  of  demand  and  sup- 
ply, will  gradually  fall  until  foreign  exchange  will  be  at  par. 

If,  on  the  other  hand,  foreign  exchange  falls  below  par,  it 
is  easy  to  prove  by  means  of  the  same  process  of  reasoning 
that  this  fall  in  value  will  involve  a  loss  to  the  merchants 
who  have  sold  goods  abroad.  Consequently  it  will  tend  to 
reduce  exports,  and  thus  reduce  the  supply  of  foreign  ex- 
change until  its  value  has  again  reached  par. 

All  this  is  simply  another  manifestation  of  the  ordinary 
workings  of  demand  and  supply,  which  tend  always  to  bring 
the  value  of  an  object  back  to  the  point  of  equilibrium  by 
increasing  or  curtailing  production  whenever  its  value  varies 
to  any  great  extent  from  a  normal  level. 

We  have  said  that  in  some  exceptional  cases  the  rate  of 
exchange  may  fluctuate  greatly,  even  to  an  unlimited  extent. 
Such  cases  are  the  following :  — 

1  After  the  Franco-Prussian  War  of  1870  French  exports  increased  very 
greatly  during  several  years.  Why  ?  Because  the  enormous  payments 
which  the  French  were  required  to  make  to  Germany  led  to  a  great  rise  in 
the  price  of  foreign  exchange,  and  the  profit  which  exporters  made  by  selling 
the  bills  which  they  drew  on  their  foreign  debtors  was  so  great  that  they 
could  afford  to  be  satisfied  with  a  small  profit  on  the  goods  they  sold,  or  even 
to  sell  them  at  a  slight  loss.  The  result  was  that  French  goods  were  sold 
abroad  not  so  much  because  of  the  profit  on  the  goods  themselves  as  because 
exporters  could  thus  draw  bills  of  exchange  on  their  foreign  debtors  and  then 
sell  these  bills  at  a  considerable  gain. 


386  PRINCIPLES    OF   POLITICAL   ECONOMY 

(1)  When  a  bill  of  exchange  is  payable  at  a  place  that 
is  far  distant  or   inaccessible,  the  cost   of  shipping  money 
would  be  very  considerable,  and  fluctuations  in  the  rate  of 
exchange   are  likely  also  to  be  considerable.     It  is  evident 
that  a  dealer  having  payments  to  make  at  Khartoum  or  at 
one  of  the  new  towns  that  are  springing  up  in  the  Klondike 
region,  would  regard  himself  as  very  fortunate  in  finding 
exchange   payable   at   these   places,   even   though   he   were 
obliged  to  pay  a  premium  of  10  or  12  per  cent.     A  creditor, 
on  the  other  hand,  who  has  drawn  a  bill  payable  at  such  a 
distant  place,  would  be  glad  to  negotiate  it,  even  at  10  or  12 
per  cent  below  par. 

(2)  But  it  is  especially  when  we  have  to  do  with  a  country 
whose  money  is  depreciated,  that  fluctuations  in  the  rate  of 
exchange  may  become  excessive  and  appear  to  have  no  limit 
at  all.     A  bill  of  exchange  on  Rio  Janeiro  will  bring  only  half 
its  nominal  value  in  London  or  Paris,  because  the  Brazilian 
milreis,  having  a  nominal  value  of  55  cents,  is  really  worth 
only  about  30  cents.      Exchange  payable  in  a  depreciated 
money  must  necessarily  suffer  a  depreciation  equal  to  that  of 
the  money  itself.     Inversely,  a  bill  of  exchange  on  London 
or  Paris  brings,  at  Rio  Janeiro,  twice  its  nominal  value  in 
the  money  of  the  country.     Even  paper  on  Spain  is  worth 
only  two-thirds  of  its  nominal  value. 

Not  only  paper  money  may  be  depreciated,  but  metallic 
money  as  well,  and  its  depreciation  has  the  same  effect  on  the 
rate  of  exchange.  This  is  true  to-day  of  silver  money,  which 
has  lost  half  its  value.  Hence  all  claims  on  countries  having 
a  silver  money  system,  such  as  those  of  the  Orient  and  Asia, 
lose  half  their  value.  Conversely,  all  claims  on  nations  hav- 
ing a  gold  standard  (payable  at  London,  for  example)  bring 
a  high  premium  in  countries  having  a  silver  standard.  This 
state  of  affairs  naturally  complicates  business  relations.1 

1  It  is  especially  in  this  connection  that  we  notice  the  effects  of  the  rate  of 
exchange  on  exports  and  imports,  referred  to  in  a  previous  section  (page  299). 
The  Hindoo  farmer,  who  sells  his  wheat  for  3  shillings  a  bushel  in  London  can 


FLUCTUATIONS   IN   BATE- OF   EXCHANGE  387 

A  study  of  the  rate  of  exchange,  therefore,  enables  us  to 
understand  the  economic  and  monetary  condition  of  a  coun- 
try, even  though  we  may  have  no  other  knowledge  to  guide 
us.  A  careful  observation  of  the  rate  of  exchange  will  per- 
mit us  to  tell  whether  a  country  buys  more  than  it  sells  or 
sells  more  than  it  buys,  whether  or  not  it  has  a  depreciated 
money,  and  what  is  the  extent  of  the  depreciation. 

(3)  Finally,  whenever  the  debtor  finds  it  difficult  to  obtain 
gold,  because  his  credit  is  limited,  or  because  the  banks  make 
it  hard  for  him  to  get  bills  discounted,  or  because  the  balance 
of  trade  (or,  rather,  of  accounts)  has  drained  the  country  of 
its  gold,  the  rate  of  exchange  may  rise  far  above  par.  When, 
for  example,  France  agreed  to  pay  Germany  a  war  indemnity 
of  11,000,000,000,  France  would  have  had  some  difficulty  in 
securing  enough  gold  to  pay  this  enormous  tribute  ;  there- 
fore the  French  government,  in  order  to  effect  payment, 
sought  everywhere  for  paper  payable  on  Germany  or  even 
on  London,  in  order  to  pay  by  way  of  arbitrage.1  Hence  the 
rate  of  exchange  on  Germany  or  even  on  London  continued 
to  be  above  par,  not  only  in  France,  but  elsewhere. 

negotiate  his  bill  of  exchange  on  London  (payable  in  English  gold  money) 
for  twice  its  value  in  Indian  silver  money.  Conversely,  the  English  manufac- 
turer who  sells  cloth  or  cotton  goods  to  the  Indies  is  obliged  to  negotiate  his 
bill  on  Bombay  or  Madras  for  half  its  nominal  value,  because  it  is  payable 
in  silver  money.  He  can,  to  be  sure,  for  this  reason  double  the  price  of  his 
goods,  but  this  will  lead  to  the  loss  of  some  of  his  customers. 

1  Arbitrage  is  a  variety  of  exchange  business  somewhat  more  complicated 
than  the  ordinary  traffic  in  bills  of  exchange. 

We  may  describe  it  as  follows  :  Paper  on  London  is  offered  for  sale  in  all 
commercial  centres  of  the  world.  If  it  is  too  dear  at  New  York,  it  may  be 
purchased  elsewhere  at  a  lower  price  because  of  different  commercial  condi- 
tions. Arbitrage  consists  in  buying  exchange  where  it  is  cheap  and  selling  it 
where  it  is  dear.  Arbitrage  brokers  facilitate  international  payment  by 
extending  the  method  of  balancing  accounts  to  all  the  nations  of  the  earth. 
Dear  commercial  paper  is  the  characteristic  of  countries  having  more  debts 
than  claims  ;  if  these  countries  attempted  to  settle  their  debts  directly,  they 
could  not  do  so  by  simply  balancing  accounts.  But  if  the  bankers  in  such  a 
country  purchase  commercial  paper  abroad  at  the  places  where  an  inverse 
condition  of  affairs  prevails  and  where  they  can  buy  bills  at  a  low  price,  this 


388  PRINCIPLES   OF   POLITICAL  ECONOMY 

X.  A  Rise  in  the  Rate  of  Discount 

Banks  incur  the  risk  of  being  obliged  to  redeem  a  great 
quantity  of  their  notes  whenever  considerable  amounts  of 
money  must  be  paid  to  foreign  nations.  As  these  payments 
cannot  be  effected  in  paper  money  or  bank  notes,  but  only  in 
coin,  people  will  turn  to  the  banks  to  convert  their  notes  into 
specie. 

Suppose  that  as  the  result  of  a  failure  in  the  wheat  crop, 
France  is  obliged  to  purchase  80,000,000  bushels  of  wheat 
from  the  United  States.  This  means  that  the  sum  of  about 
160,000,000  must  be  sent  to  this  country,  and  the  banks  of 
France  may  be  sure  that  a  great  part,  if  not  all,  of  this  money 
will  be  withdrawn  from  their  coffers.  It  is  in  the  banks,  as 
we  have  pointed  out,  that  the  floating  capital  of  a  nation 
accumulates,  and  people  turn  to  the  banks  in  time  of  need. 
This  situation  may  become  perilous  for  a  bank  if  its  reserve, 
and  especially  its  gold  reserve,  is  short.  Fortunately,  the 
banks  are  forewarned  of  this  contingency  by  surer  signs  than 
the  sailor  obtains  from  the  barometer,  viz.,  by  the  rate  of  ex- 
change. For  if  the  rate  of  exchange  becomes  unfavorable, 
i.e.  if  foreign  paper  is  negotiated  above  par,  the  bank  may 
conclude  that  debtors  who  have  payments  to  make  abroad 
are  too  numerous,  —  much  more  numerous  than  those  who 
will  receive  payments  from  abroad,  —  and  that  as  debts  and 
claims  do  not  equal  each  other,  it  will  be  necessary  to  ship 
specie  abroad  to  settle  the  difference.  (See  page  298.)  l 

will  permit  of  regulating  the  nation's  accounts  by  means  of  reciprocal  claims 
and  debts. 

If  the  method  of  payment  by  balancing  accounts  were  confined  to  two 
nations,  it  would  in  many  cases  be  practically  impossible.  The  United  States, 
for  example,  bought  $143,000,000  worth  of  goods  from  the  United  Kingdom 
in  1901,  and  sold  $631,000,000  ;  on  the  other  hand,  we  sold  only  $255,000 
worth  of  goods  to  Switzerland,  and  bought  $16,000,000  worth. 

1  Even  without  supposing  a  rise  in  the  rate  of  exchange,  the  gradual  in- 
crease in  the  amount  of  commercial  paper,  coinciding  with  a  decline  in  the 
amoHnt  of  the  cash  reserve,  indicates  a  disquieting  situation.  From  the  ob- 
servation of  these  two  facts,  M.  Juglar  has  deduced  a  method  of  foretelling 


DECREASING   NOTE   CIRCULATION  389 

When  the  danger  has  thus  been  perceived,  the  next  step  is 
for  the  bank  to  take  the  necessary  precautions  against  it.  To 
guard  against  too  great  cash  payments,  the  bank  must  adopt 
the  measures  necessary  either  to  increase  its  reserve  or  to 
decrease  the  quantity  of  its  notes  in  circulation  or  of  its  other 
demand  liabilities.1  It  is  not  entirely  within  the  power  of 
the  bank  to  increase  its  reserve,  but  it  does  possess  the  power 
not  to  issue  any  more  notes,  that  is,  to  make  no  more  loans 
to  the  public,  either  in  the  form  of  advances  or  in  the  form 
of  discounts.  (We  know  that  the  bank  puts  its  notes  in 
circulation  in  these  two  ways.)  It  is  obvious  that  this  plan 
will  accomplish  the  desired  result.  In  the  first  place,  the 
issue  of  notes  being  arrested,  the  quantity  of  notes  in  circu- 
lation will  not  increase.  In  the  second  place,  the  commercial 
bills  docketed  at  the  bank  fall  due  from  day  to  day,  and 
thus  bring  back  to  the  bank  either  more  notes  (thus  dimin- 
ishing the  amount  of  notes  in  circulation)  or  more  money 
(thus  increasing  the  reserve). 

The  quantity  of  notes  in  circulation  may  be  compared  to 
a  volume  of  water  increased  by  an  inlet  pipe  at  one  end,  and 
gradually  diminished  by  an  outlet  at  the  other,  in  such  a 
manner  that  the  level  may  be  kept  constantly  at  nearly 
the  same  point.  The  stream  of  notes2  enters  the  business 
world  by  issues  from  the  bank  (through  discounting  com- 
mercial paper),  and  ultimately  ceases  to  circulate  by  being 
returned  to  the  bank  in  the  form  of  collections  and  deposits. 
If,  therefore,  the  bank  closes  the  inlet  pipe  (that  is  to  say, 

economic  crises.  There  is  danger  of  a  crisis  whenever  the  two  "  curves," 
represented  by  the  amount  of  the  cash  reserve  and  by  the  amount  of  the 
credit  instruments  in  a  bank's  possession,  tend  to  diverge  rapidly;  the  oppo- 
site is  the  case  when  these  two  curves  tend  to  meet.  Experience,  as  a  rule, 
has  confirmed  this  ingenious  theory. 

1  We  have  already  explained  how  discounting  (page  373)  gives  rise  to  so- 
called  deposits  which,  although  not  made  in  money,  nevertheless  constitute  a 
demand  liability  of  the  bank. 

2  This  argument  apparently  presupposes  the  free  issue  of  notes.     But,  as 
the  student  will  learn  by  reading  the  section  on  the  Organization  of  Banks, 
the  free  and  unlimited  right  of  issue  does  not  exist  in  this  country. 


390  PRINCIPLES   OF   POLITICAL   ECONOMY 

if  it  ceases  to  issue  any  more  notes)  and  leaves  open  the  out- 
let (by  continuing  to  collect  paper  that  falls  due,  and  to  re- 
ceive deposits),  it  is  obvious  that  all  notes  may  ultimately  be 
withdrawn  from  circulation.1 

Nevertheless,  the  complete  cessation  of  all  advances  and  of 
all  discounting  business  would  be  too  radical  a  measure.  It 
would,  in  the  first  place,  by  suppressing  credit,  provoke  a 
terrible  crisis  in  the  country.  It  would,  in  the  second  place, 
work  great  injury  to  the  bank  itself  by  putting  an  end  to  its 
transactions  and  hence  to  its  profits.  The  bank  may  bring 
about  the  same  result  in  a  less  violent  manner  by  merely  re- 
stricting the  amount  of  its  advances  and  its  discounts.  To 
accomplish  this  it  is  sufficient  to  raise  the  rate  of  discount  or 
to  be  more  particular  about  accepting  commercial  paper  that 
is  offered  for  discount.  It  may  do  the  latter  by  refusing  to 

1  Suppose,  for  example,  that  the  bank  has  on  hand  $1,000,000  worth  of 
commercial  paper  falling  due  at  more  or  less  distant  dates.  Suppose,  fur- 
ther, that  it  has  a  cash  reserve  of  $1,000,000,  and  that  its  outstanding  cir- 
culation of  notes  amounts  to  $2,000,000. 

Under  such  circumstances  as  these  it  is  evident  that  if,  as  the  result  of  a 
panic  of  some  sort,  all  the  holders  of  notes  came  to  the  bank  and  demanded 
their  immediate  redemption  in  specie,  the  bank  would  be  unable  to  comply. 
But  as  soon  as  the  bank  has  reason  to  fear  such  an  eventuality,  all  that  it 
will  have  to  do  is  to  cease  discounting  commercial  paper.  When  this  step  has 
been  taken,  this  is  what  will  occur  :  The  bills  of  exchange  in  the  possession 
of  the  bank  fall  due  from  day  to  day,  and  all  of  its  outstanding  loans  will 
return  in  ninety  days  at  the  outside,  their  average  duration  being  much  less 
than  this.  (See  page  371.)  When  these  loans  have  been  paid,  what  will  be 
the  situation  ?  The  bank,  having  received  $1,000,000  in  payment  of  bills  that 
have  fallen  due,  will  now  have  $2,000,000,  and  this  is  precisely  the  quantity 
of  notes  in  circulation.  There  is  therefore  no  cause  for  alarm.  But  if  the 
commercial  paper  has  not  been  paid  for  in  specie,  but  in  bank  notes,  it  follows 
that  there  are  only  $1,000,000  in  notes  still  outstanding,  and  as  this  is  the  ex- 
tent of  the  reserve,  there  is  in  this  case  also  no  cause  for  alarm. 

If,  however,  the  bills  of  exchange,  etc.,  have  been  collected  half  in  specie 
and  half  in  the  notes  of  the  bank,  the  bank  will  then  have  on  hand  $1,500,000 
in  specie,  and  the  outstanding  notes  will  equal  the  same  amount.  Hence,  in 
this  event  too,  there  is  nothing  to  be  feared.  Indeed,  the  same  is  true  of  any 
imaginable  combination  of  circumstances,  provided  the  amount  of  notes 
issued  does  not  exceed  the  total  capital  of  the  bank. 


INCREASING    THE   RATE   OF   DISCOUNT  391 

buy  bills  that  will  not  fall  due  soon,  or  the  signature  upon 
which  does  not  seem  to  be  sufficiently  reliable. 

These  measures,  to  be  sure,  however  moderately  they  may 
be  applied,  are  not  agreeable  to  the  business  public.  They 
are  all  the  more  unpleasant  because  they  occur  at  the  very 
time  when  there  is  need  of  specie,  and  because  they  make  it 
harder  to  obtain  specie.  Banks  have  sometimes  even  been 
accused  of  provoking  crises,  and  the  complaint  may  readily 
find  credence.  To  increase  the  rate  of  discount  is  certainly 
a  heroic  remedy,  but  it  is  nevertheless  the  one  remedy  that 
suits  the  situation,  and  a  prudent  bank  must  not  hesitate  to 
resort  to  it  to  defend  its  reserve.  Experience  has  amply 
demonstrated  its  efficiency. 

This  measure,  moreover,  is  not  only  fortunate  in  its  results 
for  the  bank,  by  warding  off  a  threatened  danger,  but  it  has 
beneficial  effects  upon  the  country  by  favorably  modifying 
its  economic  situation.  Take  a  nation  that  is  likely  to  be 
obliged  to  ship  large  amounts  of  specie  abroad.  A  rise  in 
the  rate  of  discount,  effected  at  the  right  time,  reverses  the 
economic  situation  by  making  the  country  a  creditor  of  for- 
eign nations  for  considerable  sums,  and  thus  gives  rise  to  an 
influx  of  money  from  abroad,  or  at  least  prevents  the  outflow 
of  a  nation's  own  supply  of  money.  Let  us  consider  what 
really  takes  place  in  such  a  case  as  this. 

The  first  result  of  a  rise  in  the  rate  of  discount  is  the 
depreciation  of  all  commercial  paper.  A  bill  of  exchange 
for  $1000,  which  sold  for  $970  when  the  rate  was  3  per 
cent,  can  be  negotiated  only  for  $ 930  when  the  rate  has 
risen  to  7  per  cent ;  this  is  equivalent  to  a  fall  in  value 
of  more  than  4  per  cent.1  Henceforward  the  bankers  of 
all  nations,  especially  so-called  arbitrage  brokers,2  will  pur- 
chase bills  of  exchange  in  this  country,  because  they  can 
be  bought  here  at  a  low  price  ;  foreign  nations  will  thus 
become  our  debtors  to  the  extent  of  these  purchases. 

1  In  order  not  to  complicate  the  problem,  we  are  assuming  that  bills  are 
for  a  term  of  one  year.  2  See  page  387. 


392  PKINCIPLES    OF    POLITICAL   ECONOMY 

The  second  result  is  the  depreciation  of  all  stock-exchange 
securities.  Every  financier  knows  that  the  stock  exchange 
is  greatly  interested  in  the  rate  of  discount,  and  that  a  rise 
in  the  rate  of  discount  almost  always  entails  a  fall  in  the 
value  of  stocks.  Stock-exchange  securities  (especially  those 
that  are  designated  as  international,  because  they  are  quoted 
on  the  principal  stock-exchanges  of  the  world),  are  frequently 
employed  by  merchants  or  at  least  by  bankers  in  place  of 
commercial  paper,  to  pay  their  debts  abroad.1  Business  men 
who  cannot  negotiate  their  commercial  paper,  or  can  do  so 
only  at  a  heavy  loss,  prefer  to  get  money  by  selling  whatever 
shares  or  stock  securities  they  may .  possess.  Hence  these 
stocks  tend  to  fall  in  value,  just  as  commercial  paper  falls. 
But  as  a  fall  in  the  value  of  commercial  paper  results  in  an 
increased  demand  for  it  on  the  part  of  foreign  bankers, 
similarly  a  decline  in  the  value  of  stock-exchange  securities 
gives  rise  to  increased  purchases  of  them  by  foreign  capital- 
ists; and  thus  the  United  States  will  become  the  creditor  of 
foreign  nations  to  the  extent  of  these  purchases. 

Finally,  if  the  rise  in  discount  is  great,  and  sufficiently 
lasting,  it  will  cause  a  third  result,  viz.,  a  fall  in  the  price  of 
commodities.  We  have  just  explained  that  business  .men  who 
need  money  begin  to  obtain  it  by  negotiating  their  commer- 
cial paper.  When  that  resource  fails  or  becomes  too  costly, 
they  make  use  of  whatever  stock  securities  they  possess:  and, 
finally,  if  these  various  measures  do  not  suffice,  they  must,  in 
order  to  get  money,  sell  the  goods  they  have  on  hand.  The 
natural  consequence  of  this  last  measure  is  a  general  fall  in 
prices.  But  this  fall  produces  the  same  effects  as  those 
already  considered,  only  on  a  larger  scale:  it  stimulates  pur- 
chases from  abroad,  increases  the  exportation  of  goods  from 

1  If  you  have  a  payment  to  make  in  London,  for  example,  the  simplest 
plan  is  to  obtain  commercial  paper  payable  in  London  ;  but  you  can  also  use 
Italian  Debt  coupons,  Lombard  Railway  debentures,  Ottoman  Bank  bonds, 
etc.,  which  are  also  payable  in  London,  and  which  consequently  constitute 
another  sort  of  international  money  that  is  frequently  used  for  this  purpose. 


THE  NATURE   OF   LAND   CREDIT  393 

this  country,  and  thus  makes  the  United  States  a  creditor  of 
foreign  nations  to  the  amount  of  these  purchases. 

All  these  effects  may  be  summed  up  by  declaring  that  a 
rise  in  the  rate  of  discount  creates  an  artificial  scarcity  of 
money,  and  thus  involves  a  general  decline  in  values.  This  is 
undoubtedly  an  evil.  But  it  also  gives  rise,  as  a  conse- 
quence, to  large  purchases  from  abroad  and  to  the  importa- 
tion of  money.  The  ultimate  effect  is  therefore  beneficial, 
and  is  precisely  the  remedy  best  suited  to  the  situation. 

XI.  Some  Special  Forms  of  Credit 

§  1.  LAND  CREDIT.  One  of  the  oldest  and  simplest  forms 
of  credit  is  that  based  on  land  as  security,  and  which  takes 
the  form  of  a  mortgage.  From  the  standpoint  of  the  lender 
it  possesses  an  advantage  that  has  always  made  it  a  desirable 
investment,  namely,  an  almost  absolute  security,  due  to  the 
fact  that  land  cannot  be  destroyed  or  stolen.  But  aside  from 
this  advantage,  such  loans  possess  great  disadvantages  for 
both  parties  concerned.  They  burden  the  borrower  with  a 
comparatively  high  rate  of  interest,  —  seldom  less  than  5 
per  cent,  —  whereas  the  profits  of  farming  generally  bring 
a  lower  rate  of  return  than  this.  Although  the  land  on 
which  a  mortgage  is  based  provides  abundant  security,  the 
lender  is  unable  to  enforce  payment  very  readily  ;  his  claim 
is  not  easily  sold,  and  when  the  time  for  payment  arrives,  it 
is  often  necessary  for  him  to  adopt  measures  that  are  as  un- 
pleasant for  him  as  for  the  unfortunate  debtor,  namely, 
seizure  and  ejection. 

The  last  source  of  objection  may  be  removed  to  some 
degree,  so  far  as  the  lender  is  concerned,  by  making  mort- 
gages negotiable  simply  upon  indorsement,  like  any  other 
commercial  credit ;  in  some  countries  this  system  has  been 
introduced  and  carefully  elaborated.  But  it  is  extremely 
doubtful  whether  any  sj^stem,  no  matter  how  ingenious,  will 
ever  enable  the  holder  of  a  mortgage  to  negotiate  it  as  easily 


394  PRINCIPLES    OF   POLITICAL   ECONOMY 

as  he  could  commercial  paper  ;  this  would  be  contrary  to  the 
nature  of  things,  for  a  mortgage  will  always  to  some  extent 
partake  of  the  immobility  of  the  land  upon  which  it  is  based. 

A  more  ingenious  system  consists  in  founding  banks  of  a 
special  nature,  sometimes  designated  in  France  and  Germany 
as  land-credit  societies.  These  societies  play  the  part  of 
intermediaries  between  capitalists  and  landowners.  They 
borrow  money  from  the  former  in  order  to  lend  it  to  the 
latter,  and  although  they  do  not,  of  course,  perform  this 
service  gratuitously,  they  offer  some  important  advantages 
to  both  parties  concerned.  To  the  capitalist  who  lends 
money  they  offer  credit  instruments  that  are  quite  as  safe  as 
mortgages  (inasmuch  as  they  have  the  same  security),  but 
which  are  much  more  easily  negotiable  because  they  are  not 
guaranteed  by  a  particular  piece  of  land,  but  by  the  entire 
assets  of  the  society.  As  the  society  is  generally  a  strong 
organization  financially,  the  credit  instruments  which  it  issues 
circulate  quite  as  readily  as  stocks  or  bonds.  To  the.  land- 
owners who  borrow  money  through  them,  these  societies  offer 
the  following  three  advantages  :  (#)  the  loans  they  make 
are  for  long  periods,  e.g.  seventy -five  years  ;  (5)  repayment 
is  effected  very  gradually,  by  means  of  small,  almost  imper- 
ceptible annuities ;  (<?)  they  exact  a  comparatively  low  rate 
of  interest. 

For  our  own  part,  we  do  not  highly  appreciate  the  useful- 
ness of  land  credit,  no  matter  what  ingenious  forms  may  be 
given  to  it.  Without  going  so  far  as  to  lay  down  an  absolute 
and  rigid  rule  regarding  this  subject,  we  maintain  from  a 
general  point  of  view  that  there  cannot  be  any  great  social 
advantage  in  making  it  easy  for  the  small  landowner  to 
borrow  money  by  way  of  a  mortgage.  Such  loans  often 
end  disastrously.  We  are  rather  disposed  to  accept  the 
opposite  idea  and  insist  upon  the  adoption  of  measures  to 
restrict  the  right  of  the  farmer  (  especially  the  small  farmer  ) 
to  borrow  money  by  offering  his  land  as  security. 

In  the  United  States  this  is  accomplished  by  means  of  so- 


RAIFFEISEN    LOAN   BANKS  395 

called  homestead  laws.  The  homestead  may  be  defined  as  the 
house,  and  the  land  connected  therewith,  which  forms  the 
immediate  residence  of  a  family.  Homesteads  are  secured 
beyond  reach  of  creditors  or  liabilities  on  the  part  of  their 
owners.  The  extent  'to  which  the  homestead  is  exempt  from 
seizure  for  debts  varies,  according  to  the  laws  of  the  various 
states,  from  $500  in  Maine  to  15000  in  California. 

§  2.  AGRICULTURAL  CREDIT.  The  farmer  has  need  not 
only  of  the  capital  required  to  purchase  a  farm  and  its  neces- 
sary equipment  in  buildings,  etc.,  but  also  of  a  certain  amount 
of  floating  capital  to  meet  the  expenses  of  carrying  on  agri- 
culture. Farming,  by  its  very  nature,  does  not  yield  its 
returns  until  the  end  of  a  year's  work,  and  sometimes  only 
after  a  much  longer  period  of  working  and  waiting.  There 
is,  however,  during  all  this  time  a  constant  need  of  expendi- 
ture, and  the  farmer  continually  needs  funds  to  meet  these 
running  expenses.  It  is  the  object  of  agricultural  credit  to 
provide  capital  for  this  purpose. 

Agricultural  credit,  in  the  sense  here  given  to  it,  is  not 
based  on  the  land  itself.  It  is  secured  either  by  the  equip- 
ment of  the  farm,  its  cattle  and  crops,  or  by  the  personal 
solvency  of  the  debtor,  usually  backed  up  by  his  membership 
in  some  organization  which  holds  its  participants  liable  for 
each  other's  debts. 

The  second  of  these  methods  has  made  remarkable  progress 
in  Germany,  in  the  form  of  mutual  credit  societies  among 
farmers.  These  farmers  lend  money  to  each  other  through 
the  medium  of  their  societies,  and  employ  their  collective 
credit  to  obtain  loans  frqm  outsiders  upon  terms  much  more 
favorable  than  any  individual  would  be  likely  to  receive  for 
himself.  The  most  celebrated  of  these  organizations  are  the 
Raiffeisen  Loan  Banks,  so  named  after  their  founder.  They 
present  the  following  features  :  («)  members,  as  such,  make 
no  payment  to  the  organization,  as  there  are  no  "  shares  "  or 
"  capital  stock  " ;  (7>)  they  receive  no  dividends,  and  whatever 
profits  there  may  be  constitute  a  part  of  the  general  funds  ; 


396  PRINCIPLES    OF    POLITICAL   ECONOMY 

((?)  the  members  are  all  liable,  to  the  extent  of  their  property, 
for  each  other's  debts.  The  last  of  these  features  explains 
the  exceptional  moral  and  educational  value  of  these  organi- 
zations. 

§  3.  PEOPLE'S  BANKS.  It  is  a  familiar  remark  that  "only 
the  rich  can  borrow,"  and  the  experience  of  every  day  seems 
to  prove  it.  Yet  the  poor  also  may  have  need  of  credit,  even 
more  than  the  rich.  How,  then,  can  they  obtain  it? 

This  problem  is  easily  solved  by  cooperation.  An  isolated 
laborer  or  artisan,  no  matter  how  honest  or  industrious 
he  may  be,  cannot  furnish  sufficient  guarantee  for  a  loan. 
Sickness,  loss  of  work,  and  death,  may  at  any  time  overtake 
him  and  make  it  impossible,  despite  his  best  intentions,  to 
pay  back  what  he  has  borrowed.  But  if  laborers  or  artisans 
to  the  number  of  ten,  a  hundred,  or  a  thousand  are  grouped 
in  an  organization,  and  held  together,  if  need  be,  by  the  ties 
of  collective  responsibility,  the  security  they  have  to  offer 
will  be  considerably  greater,  and  they  will  find  it  much 
easier  to  obtain  credit  without  falling  into  the  hands  of 
usurers.  The  dues  which  are  paid  to  such  an  organization, 
moreover,  will  ultimately  build  up  a  large  amount  of  capital 
which  the  organization  can  lend  to  its  members. 

Under  the  leadership  of  a  man  whose  name  is  still  con- 
nected with  them,  —  that  of  Schulze-Delitzsch,  —  these  coop- 
erative banks,  the  essential  characteristic  of  which  is  the 
unlimited  liability  of  all  members,  have  achieved  extraordi- 
nary success  in  Germany.1  The  heads  of  these  associations 

1  The  first  of  these  banks  was  established  in  1849.  The  system  made  but 
slow  progress  until  1860,  when  it  grew  more  rapidly.  According  to  the  latest 
report  issued  (that  of  1901)  there  were  949  German  cooperative  banking  asso- 
ciations and  621  consumers'  cooperative  societies.  Statistics  are  given  for 
only  870  of  the  former,  having  a  total  membership  of  511,000,  a  capital  (in- 
cluding shares,  deposits,  and  loans)  of  $200,000,000.  The  loans  made  to 
members  amounted  to  nearly  $575,000,000.  Compared  with  this  enormous 
amount  of  business,  the  losses  were  insignificant, — only  one-twentieth  of 
one  per  cent.  The  profits  amounted  to  $3,000,000,  most  of  which  was  divided 
among  the  members,  —  not,  as  the  cooperative  principle  would  seem  to  dic- 
tate, according  to  their  loans,  but  according  to  the  value  of  their  shares. 


BUILDING   ASSOCIATIONS  397 

hope  that  they  will  enable  small-scale  industry  to  compete 
with  the  larger  industrial  concerns,  by  helping  them  to  obtain 
the  capital  and  the  equipment  which  they  need.  This  will 
be  an  exceedingly  important  result,  if  ever  it  is  accomplished. 

It  should  be  pointed  out,  however,  that  these  cooperative 
banks,  whenever  they  succeed  in  sustaining  small-scale  com- 
merce and  small-scale  individualistic  production,  are  accom- 
plishing an  object  diametrically  opposed  to  that  of  consumers' 
and  producers'  cooperative  associations.  It  is  for  this  reason 
that  cooperators  of  the  latter  type  are  not  enthusiastic  over 
institutions  of  the  first-named  variety. 

Apparently  the  only  system  which  could  to  any  noteworthy 
degree  improve  the  conditions  of  our  city  working- classes  is 
that  which  would  grant  credit  to  groups  of  producers  and 
enable  them  collectively  to  acquire  ownership  of  their  instru- 
ments of  production.  (See  the  next  Book.)  Experiments 
along  this  line  were  made  in  France  during  the  reign  of 
Napoleon  III.  But  up  to  the  present,  credit  granted  to 
groups  of  laborers  for  productive  purposes  has  accomplished 
nothing  of  importance. 

§  4.  BUILDING  ASSOCIATIONS.  In  England  and  the  United 
States  there  seem  to  be  no  cooperative  banks,  strictly  speak- 
ing. Cooperative  credit  in  these  countries  has  been  confined 
almost  exclusively  to  the  so-called  building  and  loan  asso- 
ciations, the  primary  object  of  which  is  to  enable  working 
men  to  build  or  acquire  homes  for  themselves,  the  property 
being  mortgaged  to  the  association  till  the  amount  advanced 
is  fully  repaid. 

The  first  building  society  in  England  was  organized  in 
1781,  although  societies  of  this  sort  were  not  recognized  by  law 
until  1836.  By  the  year  1898  there  were  some  2500  of  them 
in  England,  with  aggregate  assets  of  nearly  $300,000,000. 
The  first  building  association  in  America  was  organized  at 
Frankford  (now  a  part  of  Philadelphia)  in  1831.  Accord- 
ing to  the  Report  of  the  Commissioner  of  Labor  (1893) 
there  are  nearly  6000  such  associations  in  the  United 


398  PRINCIPLES   OF   POLITICAL   ECONOMY 

States,  with  nearly  2,000,000  shareholders  and  assets  of  over 
$450,000,000. 

The  building  and  loan  association  is  practically  a  cooperative 
savings  bank.  Its  chief  advantage  over  the  ordinary  savings 
institution  is  that  its  funds  are  used  by  the  depositors  them- 
selves in  their  own  interests,  and  not  placed  at  the  service  of 
business  men  and  corporations.  Every  member  has  a  voice 
and  vote  in  the  management  of  the  association,  and  shares 
in  the  profits.  A  board  of  managers  has  charge  of  super- 
vising the  business  of  the  association.  As  now  commonly 
organized,  they  issue  a  fraction  of  the  capital  stock,  usually 
one-tenth,  in  what  is  known  as  a  "  series,"  and  require  that 
it  be  paid  in  monthly  instalments,  commonly  called  dues,  — 
usually  at  the  rate  of  $1  per  month  on  a  share  of  stock  the 
par  value  of  which  is  $200.  Whenever  the  monthly  pay- 
ments, plus  the  accumulated  profits,  equal  the  face  value  of 
the  shares,  the  series  is  retired.  A  series  usually  extends 
over  ten  to  twelve  years. 

The  money  obtained  by  the  association  is  loaned  to  share- 
holders who  desire  to  buy  or  build  homes.  No  member  can 
borrow  more  than  the  face  value  of  his  shares.  Thus,  the 
man  who  has  subscribed  to  five  shares  may  borrow  as  much 
as  $1000,  if  sufficient  funds  are  on  hand.  When  the  amount 
in  the  treasury  is  inadequate  to  meet  the  wants  of  all  who 
wish  to  borrow,  the  loan  is  awarded  to  whoever  will  give  the 
highest  premium  for  the  use  of  the  money  ;  this  "  premium  " 
consists  in  the  payment  of  a  few  cents  on  each  share,  above 
and  beyond  the  interest  required  by  the  association. 

As  a  rule,  the  money  paid  into  the  association  by  a  bor- 
rowing member  during  the  life  of  the  series  in  which  he  is 
interested  amounts  to  little  more  than  the  rental  price  of  the 
mortgaged  property  for  the  same  period  ;  hence  it  is  some- 
times said  by  those  who  get  homes  with  the  help  of  a  build- 
ing association  that  "the  rent  pays  for  the  place."  The 
borrower  who  regularly  pays  his  dues  and  the  interest  on 
his  loan  will  in  a  few  years  find  himself  in  possession  of 


THE  THEORY  OF  FREE  BANKING          399 

paid-up  shares  which  will  cancel  the  principal  of  the  debt 
when  it  becomes  due  and  leave  him  owner  of  his  house  with- 
out encumbrance. 

There  can  be  no  doubt  that  these  organizations  have  ren- 
dered noteworthy  services.  The  4500  societies  for  which 
reports  were  made  in  1893  had  helped  in  the  acquisition  of 
over  300,000  homes.  It  was  therefore  not  entirely  without 
justification  that  Hon.  Seymour  Dexter,  president  of  the 
National  League  of  Local  Building  and  Loan  Associations, 
declared  these  organizations  "the  most  successful  form  of 
cooperation  yet  evolved  ;  every  association  the  center  of  an 
influence  stimulating  industry,  frugality,  temperance,  home- 
owning  and  good  citizenship." 

XII.    Free  Banks 

The  economists  of  half  a  century  ago  upheld  the  doctrine 
of  free  banks  quite  as  strenuously  as  the  doctrine  of  free 
trade.  They  insisted  that  there  should  be  both  free  compe- 
tition and  free  issue  ;  in  other  words,  that  any  one  should 
have  the  right  to  engage  in  the  banking  business  if  he  chose 
to  do  so,  and  that  all  banks  should  have  the  right  to  issue 
notes  at  their  own  discretion  and  upon  their  own  responsibil- 
ity. Let  us  consider  these  two  points. 

I.  The  argument  advanced  for  free  competition  in  the 
banking  business  was  the  classical  plea  that  monopoly  means 
dearness,  whereas  competition  means  cheapness.  By  dearness 
and  cheapness  in  this  connection  they  meant  the  high  or  low 
price  demanded  by  the  banks  for  their  services. 

To  this  we  may  reply,  first  of  all,  that  it  is  by  no  means 
certain  that  competition  necessarily  causes  cheapness  or  that 
monopoly  causes  dearness.  There  are  numerous  exceptions 
to  this  economic  principle,  even  with  regard  to  the  produc- 
tion of  ordinary  commodities  (see  page  153);  and  in  the 
present  case  it  is  of  particularly  doubtful  validity.  Experi- 
ence does  not  prove  that  the  cost  of  discounting  is  lowest 


400  PRINCIPLES   OF   POLITICAL   ECONOMY 

wherever  banks  are  most  numerous.  Although  the  Bank  of 
France,  for  example,  enjoys  a  privileged  position,  and  does 
business  by  right  of  a  government  grant,  its  rate  of  discount 
rarely  exceeds  3J  per  cent. 

It  should  be  noted,  moreover,  that  the  above  classical  argu- 
ment has  nothing  to  do  with  the  most  important  aspect  of 
the  question.  The  problem  of  monopoly  versus  competition 
does  not  arise  with  reference  to  banking  operations  in 
general,  nor  especially  with  reference  to  discounting.  No 
one  denies  the  right  of  any  bank  or  similar  organization  to 
discount  commercial  paper.  Hence  it  is  mainly  with  reference 
to  the  issue  of  notes  that  the  problem  of  monopoly  versus 
competition  arises.  But  this  problem  concerns  the  gen- 
eral public  much  more  than  the  commercial  classes.  The 
bank  note  is  for  its  possessor  simply  a  kind  of  money,  and 
scarcely  anybody  advocates  free  competition  in  the  issue  of 
money.  The  right  to  coin  money  is  reserved  by  the  govern- 
ment to  itself,  and  the  Supreme  Court  of  the  United  States 
has  held  that  the  power  to  issue  paper  money  is  one  of  the 
powers  belonging  to  sovereignty.  Therefore,  when  we  have 
to  do  with  the  issuing  of  bank  notes  it  is  perfectly  reasonable 
for  the  government,  when  it  does  not  exercise  this  right,  to 
confer  it  upon  such  institution  or  institutions  as  command 
the  confidence  of  the  nation. 

When  there  are  many  banks  of  issue  there  is  likely  to  be 
a  great  variety  of  bank  notes,  unless  the  government  provides 
for  a  uniform  system  such  as  that  which  prevails  in  the 
United  States  and  Switzerland.  There  is,  on  the  other  hand, 
a  reasonable  .hope  that  when  there  are  but  a  few  great  banks 
or  only  one  bank  of  issue  in  each  country,  we  may  more  easily 
approach  a  state  of  affairs  in  which  there  will  be  but  one 
kind  of  bank  note,  circulating  in  all  countries  without  diffi- 
culty and  thus  realizing  the  long-sought  ideal  of  a  universal 
money.  (See  page  227,  note  1.) 

II.  As  regards  the  unrestricted  issue  of  notes  and  the  sup- 
pression of  all  governmental  intervention  in  this  respect,  the 


I 

FOR   FREE   ISSUE  401 

stock  argument  is  that  there  can  never  be  any  danger  of  an 
excessive  issue  of  notes.  This  danger,  it  is  claimed,  is  purely 
illusory  ;  the  simple  play  of  economic  forces  will  confine  the 
issue  within  proper  limits,  even  though  the  banks  should  try 
to  overstep  them.  The  reasons  given  for  this  are  three  in 
number  :  — 

(#)  In  the  first  place,  bank  notes  are  issued  only  in  the 
course  of  banking  operations,  i.e.  by  way  of  discounts  or 
advances  on  credit  instruments.  In  order,  therefore,  that 
bank  notes  shall  circulate,  it  is  not  sufficient  for  the  bank 
merely  to  desire  that  they  shall  do  so  ;  some  one  must  be 
disposed  to  borrow  money  from  the  bank  and  to  accept  its 
notes.  Issues  are  thus  regulated  by  the  needs  of  the  public, 
and  not  by  the  wishes  of  bankers.  The  quantity  of  notes  that 
the  hank  can  issue  depends  on  the  amount  of  commercial  paper 
presented  for  discount,  and  the  quantity  of  this  paper  depends 
in  turn  on  the  condition  of  business. 

(5)  Again,  bank  notes  circulate  only  for  a  short  time.  A 
few  weeks  after  being  issued,  they  return  to  the  bank. 
Take,  for  example,  a  note  for  $100  which  is  issued  in  exchange 
for  a  draft  ;  in  a  few  weeks,  —  ninety  days  at  the  most,  — 
when  the  bank  collects  the  draft,  the  $100  note  will  probably 
be  returned.  Perhaps  it  will  not  be  the  same  note.  But 
what  does  that  matter,  provided  it  be  a  bank  note  ?  The  lank 
will,  in  the  course  of  a  month's  or  a  year's  business,  take  in 
about  as  many  notes  as  it  issues. 

(<?)  Finally,  even  admitting  that  the  bank  could  issue  an 
excess  of  notes,  it  will  be  impossible  to  keep  them  in  circulation  ; 
for  if  too  many  are  issued  they  will  necessarily  be  depreci- 
ated, and  as  soon  as  they  are  depreciated  (no  matter  how 
small  the  depreciation  may  be)  the  holders  of  notes  will 
bring  them  to  the  bank  and  demand  payment.  It  is,  there- 
fore, useless  for  a  bank  to  inundate  the  public  with  notes, 
because  the  bank  will  in  turn  be  inundated  with  them. 

The  above  three  arguments  certainly  contain  an  element  of 
truth,  and  experience  has  generally  confirmed  them.  Banks 


402  PRINCIPLES   OF  POLITICAL  ECONOMY 

have  rarely  succeeded  in  putting  more  notes  in  circulation 
than  the  public  requires.  Yet  we  cannot  disguise  the  fact 
that  the  absolutely  unrestricted  right  of  issue  may  create 
grave  dangers,  at  least  in  times  of  crises,  —  and  crises  are 
becoming  more  and  more  frequent  occurrences  in  the  eco- 
nomic life  of  modern  society. 

No  doubt  it  is  true  that  in  theory  the  amount  of  notes 
issued  depends  on  the  public  need  for  them  and  not  on  the 
will  of  the  banks  ;  but  if  an  unscrupulous  bank  should  aim 
solely  at  attracting  customers,  it  could,  by  sufficiently  lower- 
ing the  rate  of  discount,  largely  increase  its  business  and  thus 
augment  the  amount  of  its  notes  in  circulation.  It  is  like- 
wise true  that  notes  issued  in  excessive  quantities  by  such  a 
bank  will  be  returned  to  it  for  payment  as  soon  as  they 
become  depreciated.  But  it  must  be  remembered  that  this 
depreciation  does  not  take  place  immediately.  It  will  require 
several  days,  perhaps  several  weeks.  If,  during  this  period, 
the  bank  has  issued  an  excessive  quantity  of  notes,  it  will  be 
too  late  when  they  return;  the  bank  will  no  longer  be  able 
to  redeem  them  and  will  be  "  swamped  "  by  its  own  excessive 
issues.  The  bank  itself  will,  to  be  sure,  be  the  first  party  to 
suffer  by  its  own  mistake.  But  this  does  not  concern  us 
here ;  we  are  now  examining  the  possibility  of  a  crisis,  and 
not  at  all  concerned  with  the  punishment  of  its  authors. 

XIII.    The  Organization  of  Banks 

We  have  already  pointed  out  that  the  two  important 
problems  which  arise  in  connection  with  banking  are  indi- 
cated by  the  questions  :  (1)  Shall  anybody  and  everybody 
have  the  right  to  start  a  bank  if  he  chooses  ?  (2)  What  re- 
strictions, if  any,  shall  be  established  concerning  the  issue  of 
notes  by  banks?  To  answer  these  two  questions  satisfac- 
torily is  to  solve  the  fundamental  problems  of  bank  organi- 
zation. 

The  system  of  absolute  liberty  adverted  to  in  the  preceding 


GOVERNMENT   BANKS  403 

section,  i.e.  free  competition  in  the  issue  of  bank  notes,  and 
the  total  absence  of  restriction,  is  practised  almost  nowhere. 
The  only  example  is  that  of  Scotland  ;  and  although  legally 
free  competition  prevails  in  that  country,  there  are  in  reality 
only  a  few  banks,  each  having  very  numerous  branches, 
which  possess  the  right  of  issue.  Although,  moreover,  there 
is  no  regulation  of  issues,  strictly  speaking,  a  very  effective 
guarantee  consists  in  the  fact  that  all  shareholders  are  liable, 
without  limit,  for  all  the  obligations  of  the  bank,  including 
the  notes  issued  by  it. 

Everywhere  else,  either  a  system  of  monopoly,  or  of  restric- 
tion and  regulation  by  law,  has  prevailed  ;  generally  there 
has  been  a  combination  of  both  systems.  Where  the  mo- 
nopoly system  obtains,  the  sole  right  to  issue  notes  is  exer- 
cised either  directly  by  the  government,  —  in  which  cases  we 
speak  of  Government  Banks, —  or  else  it  is  conferred  by  the 
government  on  some  private  bank  which  offers  certain  guar- 
antees. The  system  of  government  banks  prevails  only  in 
Russia,  Sweden  and  (since  a  short  while  ago)  Switzerland. 
Although  this  arrangement  is  favored  by  socialists,  who 
regard  it  as  the  "  socialization  "  of  credit  and  as  one  of  the 
steps  toward  the  collectivist  state,  it  is  generally  condemned 
as  giving  the  government  a  commercial  character  for  which 
it  is  ill  suited,  and  as  preparing  the  way  for  issues  of  paper 
money  by  giving  rise  to  an  unfortunate  confusion  of  govern- 
ment credit  with  the  credit  of  the  bank. 

In  most  countries  a  combination  of  both  systems  has  been 
adopted;  that  is  to  say,  some  adjustment  by  which  there  is 
neither  an  absolute  government  monopoly  of  the  right  to 
issue  notes,  nor  the  full  and  unrestricted  permission  for 
everybody  to  issue  them.  The  experience  of  our  own  country 
in  this  respect  has  been  sufficiently  varied  to  exemplify  the 
nature  of  the  difficulties  encountered  in  the  organization  of 
banks  of  issue. 

Early  American  banks.  At  the  present  time  the  issuing  of 
notes  is  not  regarded  as  a  necessary  function  of  banks,  nor 


404  PRINCIPLES   OF   POLITICAL   ECONOMY 

is  it  the  chief  part  of  their  business.  But  in  the  early  his- 
tory of  our  country  the  main  business  of  a  bank  was  to  issue 
"  circulating  notes."  In  New  England  the  commonest  concep- 
tion of  a  private  bank  was  that  of  a  company  or  partnership 
formed  to  supply  circulating  notes  as  a  medium  of  exchange 
in  addition  to  the  "  bills  of  credit "  issued  by  the  colonial 
governments.  In  the  charters  of  the  earliest  banks,  such  as 
the  Bank  of  North  America,  there  is  no  mention  of  circula- 
ting notes,  since  the  right  to  issue  them  existed  without  leg- 
islative authorization.  It  was  generally  believed,  moreover, 
that  if  these  circulating  notes  were  based  on  landed  security, 
current  redemption  would  not  be  necessary.  In  this  view, 
no  capital  was  needed  to  start  a  bank,  but  merely  confidence. 

The  first  bank  in  the  modern  sense  of  the  term  appears  to 
have  been  the  Bank  of  North  America,  conceived  by  Robert 
Morris,  the  financier  of  the  Revolution,  and  chartered  by  the 
state  of  Pennsylvania  in  1781.  It  was  closely  followed  by 
the  Bank  of  Massachusetts,  chartered  in  1784,  and  the  Bank  of 
New  York,  which  began  business  in  the  same  year.  The 
last-named  institution  owes  its  foundation  to  Alexander 
Hamilton,  who  counselled  the  New  York  merchants  against 
the  "  land  bank  "  which  they  were  about  to  found,  and  who 
drew  up  articles  for  a  "  money  bank  "  in  its  stead. 

The  two  United  States  Banks.  Hamilton  was  also  respon- 
sible for  the  conception  of  the  first  Bank  of  the  United 
States,  chartered  by  Congress  in  1791.  The  capital  was 
810,000,000,  of  which  18,000,000  was  open  to  public  sub- 
scription, and  the  remainder  subscribed  by  the  United 
States  government.  It  was  provided  that  payment  should 
be  made  one-fourth  in  specie  and  three-fourths  in  govern- 
ment obligations  bearing  6  per  cent  interest.  This  pro- 
vision naturally  strengthened  the  credit  of  the  government 
by  creating  a  demand  for  its  obligations.  At  the  same  time 
the  government  pledged  itself  to  grant  no  other  charter 
for  a  bank  during  the  continuance  of  this  one,  which  was 
limited  to  twenty  years.  The  bank  could  not  be  indebted 


BANKS   OF   THE   UNITED   STATES  405 

for  a  greater  amount  than  its  capital  stock,  over  and  above 
the  amount  of  its  deposits  ;  that  is,  the  deposits  were  not  to 
be  counted  as  liabilities,  in  estimating  its  rights  to  contract 
debts.  This  meant  substantially  that  the  notes  issued  by  the 
bank  might  be  equal  in  amount  to  the  capital  stock.  The 
notes  of  the  bank  were  made  receivable  for  all  public  dues  so 
long  as  they  were  payable  in  gold  and  silver  coin. 

The  consensus  of  opinion  with  regard  to  this  bank  is 
strongly  in  its  favor.  It  served  as  a  regulator  of  the  cur- 
rency and  maintained  a  high  standard  of  commercial  honor. 
Unfortunately,  the  renewal  of  the  charter  was  made  a  politi- 
cal issue.  The  weakness  of  the  Federal  party,  which  had 
been  favorable  to  the  bank,  and  the  opposition  of  the  state 
banks  who  wished  to  get  rid  of  a  superior  rival,  resulted  in  a 
refusal  to  renew  the  bank's  charter. 

The  state  banks  now  held  the  field  alone.  Almost  all  of 
them  were  of  the  joint-stock  type,  based  on  the  principle  of 
limited  liability.1  In  1812,  a  year  after  the  charter  of  the 
Bank  of  the  United  States  had  expired,  the  second  war  with 
Great  Britain  began.  A  short  time  afterward  nearly  all  the 
banks  of  the  country  except  those  of  New  England  suspended 
specie  payments.  This  was  followed  by  an  enormous  increase 
of  issues,  so  that  the  outstanding  notes,  which  had  been  esti- 
mated at  120,000,000  in  1811,  rose  to  somewhere  between 
§62,000,000  and  $70,000,000  in  1813,  and  to  somewhere 
between  199,000,000  and  1110,000,000  in  1815.  The  circu- 
lating paper  was  of  every  degree  of  value,  down  to  utter 
worthlessness.2  These  flagrant  evils  of  the  financial  system 

1  Concerning  these  banks  Mr.  J.  R.  McCulloch  wrote  as  follows  :  "  Had  a 
committee  of  clever  men  been  selected  to  devise  means  by  which  the  public 
might  be  tempted  to  engage  in  all  manner  of  absurd  projects,  and  be  most 
easily  duped  and  swindled,  we  do  not  know  that  they  could  have  hit  upon 
anything  half  so  likely  to  effect  their  object  as  the  existing  American  banking 
system.     It  has  no  redeeming  quality  about  it,  but  is,  from  beginning  to 
end,  a  compound  of  quackery  and  imposture." 

2  Professor  W.  G.  Sumner,  in  his  "  History  of  American  Currency"  tells 
of  one  bank  in  Massachusetts  with  a  nominal  capital  of  $1,000,000.     Only 


406  PRINCIPLES    OF   POLITICAL   ECONOMY 

called  for  reform,  and  as  a  result  the  second  Bank  of  the 
United  States  was  chartered  in  1816,  on  a  similar  plan  and 
with  the  same  general  objects  as  the  first  bank  of  the  same 
name.  The  capital  was  $35,000,000,  of  which  the  govern- 
ment subscribed  one-fifth.  During  its  early  history  the  bank 
was  shamefully  mismanaged,  but  it  was  later  restored  to  a 
sounder  position.  The  notes  of  this  bank,  too,  which  were 
required  to  be  paid  in  specie,  were  receivable  for  all  public 
dues.  It  brought  about  the  resumption  of  specie  payments 
and  put  an  end  to  the  disorders  and  fluctuations  which  had 
previously  prevailed. 

This  bank,  like  its  predecessor  of  the  same  name,  was 
drawn  into  politics  when  the  question  of  a  renewal  of  its 
charter  arose  during  Jackson's  first  administration.  The 
recharter  of  the  bank  was  made  the  main  political  issue  of 
1832,  and  Jackson's  opponents,  who  defended  the  bank,  were 
defeated.  Thus,  in  1836,  the  charter  expired  and  Congress 
refused  to  grant  a  new  one. 

The  State  Banks  up  to  1863.  There  seems  no  doubt  that 
the  evils  of  this  period  were  due  chiefly  to  vices  of  banking. 
The  facility  of  local  issue,  without  the  reality  or  scarcely  the 
pretence  of  redemption,  made  the  banks  reckless  as  to  the 
character  of  the  enterprises  to  which  they  gave  assistance ; 
while  the  money  thus  put  into  circulation  enhanced  prices 
and  still  further  stimulated  both  speculative  investments  and 
speculative  trading.  The  retribution  came  in  the  panics  of 
1837  and  1839,  during  which  the  United  States  lost  the 
deposits  it  had  placed  in  the  private  banks,  and  in  the  long 
and  dreary  prostration  of  industry  which  followed.1 

The  first  improvement  in  the  state-bank  system  originated 
in  Massachusetts,  where  the  Suffolk  Bank  in  Boston,  char- 

$19,141.46  was  ever  paid  in  ;  and  of  this  the  directors  subsequently  withdrew 
their  own  subscriptions,  leaving  S3, 081.11.  One  man  bought  out  eleven 
directors  for  $1300  and  then  loaned  himself  $760,265.  When  the  bank  failed, 
it  had  $86.46  in  specie,  whereas  the  notes  outstanding  were  estimated  at 
$580,000. 

1  See  Francis  Walker,  "Political  Economy,"  page  441. 


BANKING   EXPERIMENTS  407 

tered  as  an  ordinary  bank  of  issue  and  deposit  in  1818,  offered 
to  redeem  country  bank  notes  at  par  if  the  issuing  banks  would 
provide  funds  for  that  purpose,  and  would  also  make  perma- 
nent deposits  in  the  Suffolk  Bank  (which  regarded  the  use  of 
these  deposits  as  a  compensation  for  its  services).  At  first 
only  a  few  of  the  country  banks  acceded  to  this  proposal, 
whereupon  the  Suffolk  Bank  made  it  a  point  to  send  home 
for  redemption  all  the  notes  of  the  non-assenting  banks 
which  it  could  find.  Eventually  all  the  country  banks  were 
forced  into  the  arrangement,  because  it  was  found  that  under 
the  new  system  their  credit  was  so  much  improved  that  their 
notes  acquired  circulation  in  all  parts  of  the  United  States 
and  Canada.1 

Two  important  banking  experiments  were  tried  in  New 
York  by  the  legislature  of  that  state,  known  respectively  as 
the  safety-fund  system  and  the  free-lank  or  bond-deposit 
system,  both  of  which  found  imitators.  The  first  of  these, 
introduced  by  the  law  of  1829,  was  practically  a  mutual 
insurance  of  the  banks  for  the  protection  of  their  creditors. 
It  provided  that  every  bank  chartered  under  it  should  pay 
into  a  "  bank  fund"  one-half  of  one  per  cent  of  its  capital 
each  year,  until  the  fund  should  be  equal  to  three  per  cent  of 
its  capital  stock.  This  fund  was  to  be  applied  solely  to  the 
payment  of  the  debts  of  insolvent  banks  after  their  assets 
were  exhausted.  Whenever  the  fund  should  be  reduced,  the 
banks  were  called  upon  for  fresh  contributions  at  the  same 
rate  as  the  original  ones.  The  law  also  provided  for  the 
appointment  of  three  commissioners  to  examine  all  the  banks 
three  times  a  year,  or  oftener  if  required  to  do  so.  Any  three 
banks  might  call  for  a  special  examination  of  any  bank  in 
the  system. 

It  is  probable  that  the  safety-fund  would  have  proved 
ample  indemnity  to  the  holders  of  bank  notes  if  it  had 
not  unfortunately  been  applied  to  the  payment  of  other 
debts  than  those  due  for  circulation ;  but  the  numer- 

1  See  Horace  White,  "Money  and  Banking,"  second  edition,  page  325. 


408  PRINCIPLES   OF   POLITICAL   ECONOMY 

ous  bank  failures  of  1840-1842  exhausted  the  fund.  Many 
banks,  moreover,  fraudulently  issued  more  notes  than  was 
allowed  by  law.  This  was  made  possible  by  the  absence  of 
anything  like  a  proper  system  of  public  registration  or  super- 
vision of  issues.  By  the  time  that  the  system  had  been 
brought  nearer  perfection  by  amendments  of  various  kinds, 
the  charters  of  the  "safety  banks"  expired,  and  the  national 
bank  system  was  established. 

The  second  New  York  experiment,  —  more  radical  than 
the  first,  —  was  begun  in  1838.  Before  that  year  no  one 
could  get  a  banking  charter  in  the  state  of  New  York  without 
a  special  act  of  the  legislature,  and  no  one  could  invest 
money  in  a  new  bank  without  the  consent  of  the  bank  com- 
missioners of  the  state.  The  right  to  start  a  bank  was  made 
a  part  of  the  spoils  of  the  triumphant  political  party,  and 
this  corrupt  state  of  affairs  led  to  a  popular  reaction  and  to 
the  passage  of  a  law  enabling  any  person  or  association  of 
persons  to  engage  in  the  business  of  banking,  and  to  circu- 
late notes  on  condition  that  these  notes  be  secured  by  deposits 
of  such  public  stocks,  bonds,  mortgages,  etc.,  as  were  ap- 
proved by  the  state  comptroller.  Later  the  law  was  amended 
so  that  only  the  stocks  of  the  United  States  and  of  the  state 
of  New  York  should  be  accepted  as  security  for  the  note 
issues  of  the  free  banks.1 

In  several  of  the  states  which  followed  the  example  of 
New  York,  the  free-bank  and  bond-deposit'system  proved  a 
failure  because  bad  securities  were  taken  for  the  note  issues. 
Before  these  states  had  time  to  perfect  their  system,  the  Civil 
War  broke  out,  and  the  National  Bank  Act  soon  afterward 
superseded  all  other  systems. 

The  National  Banking  System.  The  financial  necessities  of 
the  Civil  War  made  it  desirable  to  place  large  government 

1  The  National  banking  system  was  to  some  extent  modelled  upon  this 
New  York  bond-deposit  system. 

Besides  the  banks  of  Massachusetts  and  New  York,  to  which  we  have 
had  occasion  to  refer  because  of  the  experiments  which  they  tried,  important 


AMERICAN   NATIONAL   BANKS  409 

loans  upon  the  market.  Accordingly,  Mr.  Chase,  Secretary  of 
the  Treasury,  advocated  a  system  of  "  national  banks  "  whose 
note  issues  should  be  secured  by  an  abundant  deposit,  at  the 
Treasury  department,  of  United  States  bonds.  In  order  that 
these  banks  should  have  a  practical  monopoly  of  the  right  of 
issue,  the  state  banks  were  to  be  obliged  to  pay  a  virtually 
prohibitive  tax  of  10  per  cent  on  their  notes.  These  sugges- 
tions were  not  all  carried  out  until  1865,  and  although  their 
adoption  came  too  late  to  be  of  any  help  in  the  financial  diffi- 
culties of  the  war,  they  resulted  in  placing  the  bank  currency 
of  the  country  on  a  more  secure  and  convenient  basis. 
Before  this  time,  the  innumerable  state  banks,  under  special 
charters,  and  practically  subject  to  no  real  regulation  or 
supervision,  had  put  into  circulation  the  most  heterogeneous 
bank  money  conceivable.  Part  of  this  money  was  subject 
to  a  discount  of  as  much  as  25  per  cent  when  offered 
for  acceptance  far  away  from  the  place  of  issue,  or  when 
issued  by  a  bank  whose  name  was  not  familiar.  This  unwill- 
ingness to  accept  some  of  the  bank  money  is  perfectly 
comprehensible  when  we  recall  that  banks  were  constantly 
failing,  that  there  was  an  abundance  of  notes  issued  by  banks 
which  had  no  real  existence  save  in  the  minds  of  the  rogues 
who  manufactured  the  notes,  and  that  professional  sharpers 
made  it  a  business  to  alter  or  counterfeit  bank  notes.1 
Under  the  new  system  all  these  evils  disappeared,  and  now  a 

progress  was  made  by  the  banks  of  some  other  states.  A  Louisiana  law  of 
1842  required  the  banks  of  that  state  to  keep  a  cash  reserve  in  a  definite  pro- 
portion to  their  deposits  and  circulation.  This  appears  to  be  the  first  law  of 
its  kind  in  America. 

1  Those  who  were  in  the  habit  of  receiving  bank  notes  found  it  necessary 
to  study  carefully  the  "  Counterfeit  Detectors"  and  other  publications  whose 
purpose  it  was  to  inform  their  readers  what  notes  to  accept  and  what  notes  to 
refuse.  One  of  these  detectors  (Bicknall's  "  Counterfeit  Detector  and  Bank 
Note  List  "  of  January  1,  1839)  contained  the  names  of  54  banks  which  had 
failed ;  of  20  fictitious  banks,  the  pretended  notes  of  which  were  in  circula- 
tion ;  of  43  other  banks  for  the  notes  of  which  there  was  no  sale  ;  of  254  banks 
the  notes  of  which  had  been  altered  or  counterfeited  ;  and  enumerated  1395 
descriptions  of  counterfeited  or  altered  notes  then  supposed  to  be  in  circu- 


410  PRINCIPLES   OF   POLITICAL   ECONOMY 

national  bank  note  issued  in  one  state  will  circulate  all  over 
the  Union  as  readily  as  at  home. 

The  principal  features  of  the  national  banking  system,  as 
at  present  organized,  are  as  follows:  — 

There  is  a  bureau  of  the  Treasury  Department,  the  chief 
officer  of  which  is  the  Comptroller  of  the  Currency,  having 
the  duty  to  takte  charge  of  all  matters  relating  to  the  "national 
banks."  A  national  bank  is  organized  in  much  the  same  way 
as  any  other  corporation,  by  any  number  of  persons  not  less 
than  five.  Upon  application  to  the  Comptroller  the  corpora- 
tion will  be  granted  or  refused  a  charter,  according  to  the 
decision  of  the  Comptroller.  When,  granted,  the  charter 
continues  for  not  more  than  twenty  years,  but  is  renewable 
with  the  consent  of  the  Comptroller.  Each  bank  is  required 
to  report  its  condition  five  times  a  year. 

The  minimum  amount  of  capital  which  a  national  bank 
must  have  depends  on  the  population  of  the  place  in  which 
it  is  located,  but  can  never  be  less  than  $25,000,  and  in  cities 
having  a  population  of  50,000  it  must  be  at  least  $200,000. 
Each  national  bank,  beside  being  allowed  to  carry  on  the 
ordinary  business  of  a  bank  (making  loans,  discounting  notes, 
buying  and  selling  exchange)  is  allowed  to  issue  "  national 
bank  notes"  for  circulation  as  money  of  the  United  States.1 

lation,  of  denominations  from  $1  to  $500.  In  1859,  Nicholas'  "Bank  Note 
Reporter  "  had  5400  separate  descriptions  of  counterfeit,  altered,  and  spurious 
notes.  (See  Horace  White,  "  Money  and  Banking,"  second  edition,  page  352.) 

1  There  are  at  present  six  kinds  of  paper  money  in  use  in  this  country. 
These  are:  (1)  United  States  notes,  or  "greenbacks";  (2)  silver  certifi- 
cates ;  (3)  gold  certificates ;  (4)  Treasury  notes  of  1890 ;  (5)  national  bank 
notes,  as  above  described ;  and  (6)  currency  certificates. 

We  have  already  referred  to  all  of  these  in  detail  except  the  Treasury  notes 
of  1890  and  the  currency  certificates.  The  issue  of  the  former  was  provided 
for  by  the  Sherman  Act  of  1890,  according  to  which  a  certain  amount  of 
silver  bullion  was  to  be  purchased  monthly  by  the  Secretary  of  the  Treasury. 
This  bullion  was  to  be  paid  for  by  a  new  kind  of  paper  money,  called  Treas- 
ury notes  of  1890. 

"Currency  certificates"  are  issued  to  national  banks  in  exchange  for 
United  States  notes  deposited  in  the  Treasury.  Their  denominations  are  not 
less  than  $5000. 


NATIONAL   BANKS  411 

The  stock-holders  are  liable  for  the  debts  of  the  bank  up 
to  double  the  par  value  of  their  stock. 

When  a  national  bank  is  organized,  it  must  invest  in  United 
States  bonds  a  sum  of  money  equal  to  at  least  one-fourth  of 
its  capital.  These  bonds  must  be  deposited  in  the  Treasury 
of  the  United  States  ;  but  they  are  still  the  property  of  the 
bank,  which  receives  the  interest  on  them.  Upon  the  secur- 
ity of  these  bonds  the  bank  receives  from  the  Comptroller  an 
amount  of  national  bank  notes  equivalent  to  the  par  value  of 
the  bonds  deposited.  Then  the  president  and  the  cashier  of 
the  bank  sign  each  note,  and  they  may  be  loaned  or  paid 
out.  If  the  bonds  should  ever  fall  below  par,  the  Comptrol- 
ler may  require  additional  security. 

The  national  bank  notes  are  not  legal  tender,  although  the 
government  will  receive  them  for  all  taxes  except  duties  on 
imports.  Each  national  bank  is  required  to  receive  the  notes 
of  every  other  bank  at  par  value,  and  to  redeem  its  own  notes 
on  demand  in  legal-tender  money.  If  it  cannot  do  this,  the 
Comptroller  will  sell  the  bank's  bonds  and  thus  obtain  money 
to  redeem  them.  The  banks,  moreover,  must  deposit  in  the 
Treasury  a  fund  in  lawful  money  (bearing  no  interest)  equal 
to  5  per  cent  of  their  outstanding  circulation ;  this  fund, 
which  is  counted  as  a  part  of  the  lawful  reserve,  is  intended 
to  be  used  for  the  redemption  of  notes  in  sums  of  $1000  or 
any  multiple  thereof. 

Each  bank  is  required  to  keep  a  reserve  of  lawful  money. 
In  the  so-called  "reserve  cities"  designated  by  Congress  the 
amount  is  25  per  cent  of  their  deposits.  Banks  outside 
these  cities  need  keep  a  reserve  of  only  15  per  cent  of 
their  deposits  ;  they  may,  moreover,  deposit  60  per  cent 

On  October  1,  1902,  the  circulating  currency  of  the  United  States  was 
made  up  as  follows : — 

Metal.  Gold  coin,  $624,728,060;  standard  silver  dollars,  $75,043,729; 
subsidiary  silver,  $89,906,205. 

Paper.  Gold  certificates,  $304,382,054;  silver  certificates,  $459,571,478; 
Treasury  notes  of  1890,  $26,741,790;  United  States  notes,  $342,930,086; 
national  bank  notes,  $352,383,259. 


412  PRINCIPLES   OF   POLITICAL   ECONOMY 

of  their  reserves  in  "credit  reserve  cities,"  i.e.  in  New  York, 
Chicago,  and  St.  Louis. 

The  national  banks  are  taxed  one-half  of  one  per  cent  on 
their  circulation,1  whereas  the  state  banks  (as  we  have  said) 
must  pay  10  per  cent.  The  object  of  this  vast  difference  is 
to  compel  the  latter  banks  either  to  come  into  the  national 
system  or  to  cease  issuing  notes  to  circulate  as  money. 

It  is  evident  that  one  great  merit  of  this  system  is  the 
unification  of  banking  in  all  the  states  and  territories.  In 
fact,  all  the  national  bank  notes  of  similar  denomination, — the 
smallest  denomination  is  $5,  —  present  a  similar  appearance, 
being  manufactured  by  the  United  States  government  on  a 
uniform  plan.  Inasmuch,  furthermore,  as  the  government 
bonds  have  always  commanded  a  premium,  there  has  never 
been  any  doubt  as  to  the  soundness  of  the  currency  issued 
under  this  system.  "  With  regard  to  its  volume,  "  says 
President  Hadley,  "  there  have  been  many  complaints.  For 
some  years  the  banks  were  anxious  to  increase  their  circula- 
tion, and  a  limitation  on  the  total  amount  which  they  were 
allowed  to  keep  outstanding  was  considered  a  hardship. 
After  1880,  on  the  other  hand,  the  price  of  the  United  States 
bonds  became  so  high  as  to  render  the  maintenance  of  the 
circulation  unprofitable,  and  a  large  amount  was  surrendered, 
reducing  the  total  volume  of  the  bank-note  issues  to  a  figure 
less  than  half  of  that  which  the  law  would  have  allowed."2 

The  Bank  of  England.  In  1694  the  English  govern- 
ment required  a  loan  of  X  1,200,000  to  continue  the  war 
against  France.  The  subscribers  to  this  loan  were  formed 
into  a  chartered  company  known  as  the  Bank  of  England, 
which  was  given  the  right  to  issue  interest-bearing  notes  to 

1  When  the  bonds  deposited  by  a  bank  bear  more  than  2  per  cent 
interest,  a  bank  must  pay  1  per  cent  annually  on  the  average  amount  of  its 
notes  in  circulation.  The  tax  does  not  apply  to  circulation  for  the  retirement 
of  which  lawful  money  has  been  deposited  in  the  Treasury. 

2  Hadley,  "  Economics,"  page  256.  On  September  1, 1902,  there  were  4269 
national  banks,  with  a  total  capital  of  $673,763,767,  and  the  amount  of 
national  bank  notes  in  circulation  was  about  $350,000,000. 


PEEL'S  ACT  OF  1844  413 

the  amount  of  the  loan.  Three  years  later  the  bank  made 
another  loan  to  the  government,  and  was  authorized  to  issue 
demand  notes,  payable  to  the  bearer,  for  a  total  amount 
equal  to  the  new  loan.  These  notes  were  accepted  by  the 
public,  at  par,  quite  as  readily  as  those  previously  issued. 
A  few  years  later  (1709)  Parliament  decreed  that  no  other 
corporation  or  partnership  of  more  than  six  persons  should 
exercise  the  right  to  issue  demand  notes  in  England.  This 
restriction  did  not  concern  Scotland  or  Ireland. 

The  charter  of  the  bank  was  renewed  from  time  to  time, 
usually  on  the  condition  of  new  loans  to  the  government,  or 
a  reduction  of  the  rate  of  interest  on  former  ones.  These 
loans  to  the  government  for  war  purposes  became  so  large 
and  so  frequent  that  the  bank  was  obliged  to  suspend  specie 
payments  from  1797  to  1821. 

In  1826  the  monopoly  of  the  bank  was  relaxed,  and  the 
privilege  of  note  issues  was  granted  to  joint-stock  banks  at 
a  distance  of  sixty-five  miles  or  more  from  London.  By  1844 
seventy-two  such  banks  had  been  established.  In  1829  the 
issue  of  =£1  bank  notes  was  suspended  in  England,  and  the 
issue  of  notes  smaller  than  <£5  was  prohibited,  for  the  purpose 
of  "saturating  the  currency  with  a  larger  infusion  of  gold." 

In  1833  Parliament  passed  an  act  making  the  notes  of  the 
Bank  of  England,  so  long  as  they  are  redeemed  in  gold  on 
demand,  legal  tender  at  all  places  in  England  and  Wales 
except  at  the  bank  itself. 

The  crisis  of  1836  and  1839,  ascribed  to  the  over-issues  of 
bank  paper,  led  to  a  movement  in  favor  of  reform.  No 
change,  however,  was  effected  until  Sir  Robert  Peel's  Act  of 
1844.  By  this  act  the  issue  of  notes  was  made  automatic, 
and  all  discretionary  power  in  this  respect  taken  out  of  the 
hands  of  the  bank  authorities.  The  Bank  of  England  was 
divided  into  two  distinct  departments.  One  of  these  depart- 
ments was  charged  with  banking  operations  (deposits  and 
discounts),  but  had  no  right  to  issue  notes.  The  other  was 
entrusted  with  the  issuing  of  notes,  but  permitted  to  trans- 


414  PRINCIPLES    OF   POLITICAL   ECONOMY 

act  no  banking  business.  The  sum  of  £14,000,000  of  secu- 
rities, including  the  government's  debt  to  the  bank,  was 
transferred  to  the  issue  department,  which  should  turn  over 
to  the  banking  department  £14,000,000  of  notes.  This  was 
the  average  amount  of  the  bank's  notes  then  outstanding. 
Above  and  beyond  this  sum,  the  issue  department  could  issue 
notes  to  any  persons  only  in  exchange  for  gold  coin  or  stand- 
ard gold  bullion.  Banks  and  banking  firms  having  the  right  to 
issue  notes  at  that  time  were  allowed  to  continue  to  issue  the 
same  average  amount  of  notes ;  but  if  they  should  cease  to 
do  so,  the  Bank  of  England  might  be  authorized  by  the  Privy 
Council  to  issue  two-thirds  of  the  amount  so  withdrawn,  by 
adding  an  equivalent  sum  to  the  government  securities  in  the 
issue  department.  Under  the  operation  of  this  clause  the 
circulation  of  the  bank  against  securities  has  been  gradually 
raised  to  X17,775,000.  Every  note  beyond  this  sum  must 
be  based  on  an  equal  amount  of  coin  or  bullion  placed  in  the 
hands  of  the  bank.  Even  the  bank  itself  cannot  get  notes 
on  terms  different  from  these.  When  it  wants  fresh  supplies 
of  notes,  it  must  take  gold  out  of  the  banking  department 
and  transfer  it  to  the  issue  department ;  and  to  recover  gold, 
it  must  reverse  the  process.  To  all  intents  and  purposes  the 
Bank  of  England  note  is  of  the  same  nature  as  our  gold 
certificate.  (See  page  259.) 

Three  times,  during  the  crises  of  1847,  1857,  and  1866,  this 
system  has  been  found  wanting,  and  the  government  has 
suspended  the  restriction  on  the  note  issues  of  the  bank  and 
given  it  the  discretionary  power  which  the  Act  of  1844  had 
been  designed  to  take  away.  In  all  these  instances  the 
panic  subsided  as  soon  as  it  was  known  that  notes  could  be 
had  at  a  reasonable  price.  It  must  not  be  supposed,  however, 
that  the  suspension  of  the  Act  meant  the  suspension  of  specie 
payments,  but  simply  that  the  bank  might  issue  notes  at  its 
own  risk,  without  a  corresponding  deposit  of  gold.  What- 
ever notes  the  bank  puts  out  at  any  time  it  must  redeem  in 
gold  on  demand. 


THE  BANK   OF   FRANCE  415 

It  cannot  be  said  that  the  monopoly  system  prevails  in 
England.  The  Bank  of  England  has  no  exclusive  right  to 
issue  notes,  except  so  far  as  London  is  concerned.  Nor  is 
the  English  system  one  of  free  competition,  inasmuch  as  the 
number  of  banks  that  may  issue  notes  is  limited  to  those  that 
possessed  this  privilege  in  1844.  These  private  banks,  how- 
ever, are  not  immortal,  but  will  doubtless  disappear  sooner 
or  later ;  and  when  there  are  none  of  them  left,  the  Bank  of 
England  will  possess  a  virtual  and  legal  monopoly  of  the 
right  of  issue.  As  a  matter  of  fact,  the  number  of  these 
provincial  banks  of  issue  has  fallen  since  1844  from  279  to  63. 

The  Bank  of  France.  The  Bank  of  France  has  the  sole 
right  to  issue  notes.  It  is  not,  as  is  sometimes  asserted,  a 
government  bank,  but  a  stock  company,  organized  like  any 
other  stock  company  whose  capital  is  furnished  by  private 
citizens ;  except  that,  instead  of  being  managed  wholly  by 
the  stockholders,  its  governor  and  vice-governor  are  ap- 
pointed by  the  government. 

The  Bank  of  France  was  founded  by  Napoleon  while  he 
was  yet  First  Consul,  on  February  13, 1800.  But  its  privi- 
lege of  issuing  notes  dates  only  from  1803.  Even  then  it 
could  exercise  that  privilege  only  in  Paris  and  in  cities  in 
which  it  established  branches.  Subsequently  other  banks  re- 
ceived the  same  privilege  in  the  principal  provincial  cities. 
But  after  1848,  when  these  banks  were  merged  in  the  Bank 
of  France,  it  exercised  the  exclusive  right  of  note  issue  in  the 
whole  of  France  ;  the  right  has  been  renewed  several  times 
for  periods  of  thirty  years,  and  in  1897  was  again  extended 
till  1920.  This  privilege,  however,  is  not  conferred  on  the 
bank  gratuitously,  but  is  made  subject  to  numerous  condi- 
tions, of  which  the  following  are  the  most  important  :  — 

(1)  The  Bank  is  permitted  to  discount  only  such  bills  of 
exchange  as  bear  three  signatures  and  are  drawn  for  ninety 
days  at  the  most.1 

1  It  should  be  added  that  the  Bank  is  obliged  to  charge  the  same  rate  of 
discount  for  everybody,  and  that  it  is  unable  to  charge  a  rate  determined  by 


416  PRINCIPLES   OF   POLITICAL   ECONOMY 

(2)  It  is  not  allowed  to  pay  interest  on  its  deposits. 

(3)  It  can  make  loans  on  certain  kinds  of  securities  or  on 
bullion  ;    but  it  must  not  permit  customers,  —  except  the 
government,  —  to  overdraw  their  accounts.     To  the  govern- 
ment it  is  obliged  to  make  certain  "uncovered"  loans.1 

(4)  It  cannot  issue  notes  to  a  larger  amount  than  5,000,- 
000,000  francs  (11,000,000,000). 

(5)  It  is  obliged  to  share  its  profits  with  the  government 
according  to  a  rather   complicated   method   of   calculation 
based  on  the  amount  of  notes  issued  and  the  rate  of  discount.2 

In  the  ordinary  business  of  banking,  such  as  discounting 
and  dealing  in  exchange,  the  Bank  of  France  has  many  com- 
petitors, not  only  in  private  banks,  but  in  great  banking 
associations  which  possess  immense  capital.  In  fact,  the  Bank 
does  comparatively  little  discounting,  and  the  volume  of  its 
discount  business  is  now  decreasing.  Its  true  function  as 
a  banking  institution  is,  as  some  have  expressed  it,  that  of  a 
"bank  of  banks"  and  a  treasurer  for  other  institutions. 
Whenever  the  latter  need  money,  or  simply  want  to  avoid 
the  trouble  of  collecting  payment  for  commercial  paper,  they 
get  the  Bank  of  France  to  re-discount  the  paper  they  have 
accepted  ;  thus  they  relieve  themselves  of  the  necessity  of 
keeping  a  large  specie  reserve.  It  may  be  said,  therefore, 
that  the  whole  credit  of  the  country  depends  indirectly  on 
the  reserve  of  the  Bank  of  France.  This  great  responsibility 
explains  why  the  Bank  must  keep  an  enormous  reserve, 
which  now  amounts  to  over  $600,000,000. 

the  solvency  or  amount  of  the  credit  instruments  presented  by  each  customer. 
This  inability  to  do  as  the  other  banks  do  is  troublesome  to  the  Bank  and 
reduces  its  opportunities  of  profit ;  but  it  is  due  to  the  theory  that  small  mer- 
chants should  not  be  obliged  to  pay  more  than  large  business  concerns. 

1  The  law  of  1897,  by  which  the  charter  of  the  bank  was  renewed,  obliges 
the  Bank  to  lend  to  the  government,  without  interest,  the  sum  of  180,000,000 
francs, — aside  from  the  sum  of  40,000,000,  which  it  lends  for  agricultural 
credit  associations. 

2  The  government's  share  in  1900  was  5,655,000  francs.     If  we  add  to  this 
the  taxes  on  notes,  and  other  taxes,  the  state  received  8,783,000  francs,  — 
almost  one-fourth  as  much  as  the  shareholders. 


PROVISIONS   FOR   REDEMPTION  417 

Whether  the  system  adopted  by  a  nation  be  that  of  com- 
petition or  that  of  monopoly,  some  arrangement  (except  in 
Scotland)  is  always  devised  to  insure  the  redemption  of  the 
notes.  Four  systems  may  be  distinguished,  each  of  which 
has  been  tried  in  some  country  :  — 

(1)  The  first  consists  in  limiting  the  amount  of  the  notes  in 
circulation  by  the  amount  of  the  reserve.* 

This  is  the  system  applied  to  the  Bank  of  England  by  the 
Act  of  1844,  according  to  which,  as  we  have  seen,  the  bank 
can  issue  notes  only  to  the  amount  of  its  reserve,  plus 
£17,775,000.  Why  was  this  additional  amount  of  notes 
allowed  ?  Because  the  British  Parliament  considered  that 
within  this  limit  there  was  no  danger  of  the  bank's  inability 
to  redeem  its  notes,  the  greater  part  of  these  £17,775,000 
being  a  national  debt,  the  redemption  of  which  is  conse- 
quently guaranteed  by  the  government,  and  the  remainder 
being  equivalent  to  the  amount  of  notes  for  which  payment 
will  never  be  demanded,  because  they  are  lost  or  too  far 
distant. 

In  the  case  of  any  other  bank  than  the  Bank  of  England, 
this  limitation  could  not  be  regarded  as  furnishing  a  very 
satisfactory  guarantee  for  specie  payment.  The  capital  of  a 
bank  is  not  an  asset  that  can  be  converted  into  money  imme- 
diately, especially  when,  as  in  this  case,  it  is  represented  for 
the  greater  part  by  a  mere  claim  on  the  government. 

In  practice,  moreover,  and  precisely  in  times  of  crises,  this 
limitation  has  been  found  so  unsatisfactory  that  it  has  thrice 
been  suspended  and  the  bank  permitted  to  exceed  the  legal 
limit.  It  is  obvious  that  if  the  bank  happens  to  have  a 
reserve  of  £20,000,000,  and  £37,775,000  of  notes  in  circula- 
tion, it  will  be  obliged  to  refuse  all  discount.  For  with  what 

1  This  is  what  is  generally  known  as  the  "  currency  principle  "  for  regu- 
lating circulation,  as  opposed  to  the  "banking  principle"  or  principle  of 
bank  liberty,  to  which  we  shall  refer  later.  The  currency  principle  is  based 
on  the  belief  that  something  more  than  sound  banking  is  needed  to  give  a 
country  good  bank  money. 


418  PRINCIPLES   OF   POLITICAL   ECONOMY 

could  it  discount  the  bills  presented  ?  Not  with  notes,  be- 
cause the  limit  of  £  17,775,000  is  already  reached.  Nor  with 
the  specie  in  its  reserve,  because  if  the  reserve  were  reduced 
by  only  one  shilling  (the  amount  of  notes  in  circulation  still 
remaining  X 37,775,000)  the  permissible  margin  would  be 
exceeded,  and  the  law  violated.  Yet  the  Bank  of  England 
cannot  refuse  discount  without  involving  the  destruction  of 
a  large  part  of  the  nation's  business  !  The  worst  feature  of 
all  this  is  that  it  becomes  necessary  to  suspend  the  law,  and 
that  the  government,  not  the  Bank,  should  assume  the  terrible 
responsibility. 

(2)  The  second  method  consists  in  fixing  a  certain  ratio 
(generally  one  to  three)  between  the  amount  of  the  reserve  and 
that  of  the  notes  issued.     This  rule  is  observed  in  Belgium  and 
Germany,1  but  not  by  the  Bank  of  France  (although  a  popu- 
lar misconception  has  given  rise  to  the  contrary  impression). 
This  system  is  more  elastic  than  the  preceding  one,  but  leads 
to  the  same  result,  at  times  making  all  discount  and  even  all 
conversion  of  notes  impossible,  and  thus  creating  the  very 
danger  that  we  are  seeking  to  avoid.2 

(3)  The  third  plan  consists  in  simply  fixing  a  maximum  of 
issue. 


1  In  Germany  the  value  of  notes  issued  may  not,   as  a  rule,  exceed 
three  times  the  reserve,  and  the  two-thirds  of  this  excess  over  the  reserve 
must  be  secured  by  credit  instruments  in  the  possession  of  the  bank,  that  is, 
by  bills  of  exchange  due  in  ninety  days  or  less. 

In  case  of  an  emergency,  however,  the  bank  may  issue  notes  beyond  this 
statutory  limit,  but  in  this  case  it  must  pay  the  enormous  tax  of  5  per  cent 
of  the  value  of  notes  thus  issued.  This  measure  is  not  unlike  the  suspension 
of  the  Peel  Act  in  England.  But  it  is  much  more  practical,  because  there  is 
no  need  to  call  for  the  intervention  of  the  government  and  the  legislature  ; 
the  bank  itself  raises  the  barrier,  so  to  speak,  without  causing  any  public 
sensation  or  a  panic. 

2  Let  us  suppose  that  the  reserve  is  $100,000,000  and  the  issue  of  notes 
$300,000,000,  for  the  sake  of  illustration.    This  would  be  the  limit  of  issue 
allowed  by  law  under  the  above  condition.     But  at  this  stage  the  bank  cannot 
redeem  a  single  note  without  reducing  its  reserve  to  less  than  one-third  the 
amount  of  notes,  —for  99,999,099  is  not  a  third  of  299,999,999. 


BOND   SECUEITY  FOE   NOTES  419 

This  system  is  practised  in  France.1  The  maximum  is 
5,000,000,000  francs.  But  what  is  the  use  of  limiting  the  issue 
of  notes,  if  the  bank  can  reduce  its  reserve  to  zero  ?  What 
guarantee  is  there  for  the  public  ?  The  sole  guarantee  con- 
sists in  the  prudence  which  a  bank  should  exercise  in  order 
to  maintain  a  proper  ratio  between  the  reserve  and  the  circu- 
lation. (As  a  matter  of  fact,  the  reserve  of  the  Bank  of 
France  is  generally  four-fifths,  or  at  least  two-thirds,  of  its 
circulation  ;  on  one  occasion  the  reserve  was  even  equal  to 
the  circulation.)  But  in  this  case  the  legal  limit  might  just 
as  well  be  done  away  with. 

(4)  The  fourth  plan  is  to  compel  banks  to  secure  their  note 
issues  by  means  of  reliable  instruments  of  value.  These  instru- 
ments or  securities  are  generally  government  bonds  which 
are  at  least  equal  in  value  to  the  notes. 

This,  as  we  have  seen,  is  the  system  employed  in  the 
United  States.  Each  bank  receives  notes  to  the  amount  of 
the  par  value  of  the  bonds  it  has  deposited  in  the  Treasury. 
In  ordinary  periods  of  commercial  life,  this  security  is  not 
necessary  to  assure  the  credit  of  a  bank.  In  times  of  crises, 
however,  that  is  to  say  at  just  the  time  when  security  is  most 
needed,  this  plan  is  no  longer  sufficient.  For  in  the  event  of 
a  crisis  all  stock-exchange  securities,  including  government 
bonds,  are  necessarily  depreciated  ;  and  if,  in  order  to  meet 
the  demands  of  note-holders  for  payment  in  specie,  the  bonds 
of  the  banks  are  put  on  the  market  for  sale,  it  would  be  a 
difficult  matter  to  dispose  of  them  for  a  sufficient  amount.2 

1  The  maximum  is  of  recent  date.    It  was  not  given  in  the  regulations  of 
the  bank,  and,  it  may  be  said,  was  introduced  by  accident  in  the  financial  law 
of  1883.     Previously  it  existed  only  in  the  case  of  forced  circulation.    Fixed 
at  3,500,000,000  francs  in  1883,  it  was  raised  to  5,000,000,000  in  1897. 

2  Professor  Gide  evidently  overlooks  the  fact  that  whenever  the  govern- 
ment bonds  deposited  by  our  national  banks  are  depreciated,  the  Comptroller 
of  the  Currency  may  require  additional  security.     (See  page  411.)     Many 
American  economists,  moreover,  would  be  disposed  to  deny  that  the  govern- 
ment bonds  will  ever  depreciate  to  such  an  extent  as  to  offer  no  sufficient 
security  for  the  redemption  of  notes. 


420  PRINCIPLES   OF   POLITICAL   ECONOMY 

Bank  notes  in  the  United  States  are,  in  a  word,  simply 
government  bonds  chopped  into  pieces  of  circulating  medium. 

The  example  of  the  United  States  shows  that  the  maximum 
of  governmental  regulation  is  reached  in  the  very  country 
where  banks  of  issue  are  most  numerous.  The  example  of 
France,  on  the  other  hand,  shows  the  minimum  of  regulation 
under  a  system  of  monopoly.  It  is  natural  that  this  should 
be  so,  for  monopoly  is  itself  a  guarantee  of  efficiency. 

We  may  say  that,  after  all,  no  system  thus  far  devised  offers 
an  absolute  guarantee  for  the  redemption  of  notes.  The  only 
sure  method  would  be  to  require  the  banks  always  to  keep  a 
reserve  equal  not  only  to  the  amount  of  notes  in  circulation, 
but  also  to  the  sum  total  of  their  deposits.  This,  of  course, 
would  be  an  absolute  guarantee  ;  but  if  it  were  adopted,  the 
banks  would  no  longer  serve  any  purpose.  They  could  no 
longer  employ  the  floating  capital  of  the  nation,  since  they 
would  be  obliged  to  keep  it  unused  in  their  vaults.  Nor 
could  they  serve  the  purpose  of  economizing  coin,  since 
bank  notes  would  merely  represent  coin.  Banks  would,  in  a 
word,  no  longer  be  institutions  of  credit.  If  we  want  to 
make  use  of  credit,  we  must  take  the  risks  that  accompany  it. 
To  seek  to  combine  both  the  advantages  of  credit  and  those 
of  strictly  cash  transactions  is  like  seeking  the  square  of  the 
circle :  the  one  excludes  the  other. 


BOOK  IV.     DISTRIBUTION 

PART   I.     THE  VARIOUS   SYSTEMS   OF 
DISTRIBUTION 

CHAPTER  I  — THE   PRESENT   SYSTEM 

I.   How  the  Distribution  of  Wealth  is  Effected 

IP  men  did  not  produce  collectively,  but  each  for  himself, 
independently,  every  one  would  also  keep  for  himself  that 
which  he  produced,  and  the  question  of  distribution  could 
not  even  arise.  Under  such  a  system,  the  rule  suum  cuique 
would  naturally  apply.  But  this  system,  in  which  there 
could  of  course  be  no  exchange  and  no  division  of  labor, 
would  be  entirely  incompatible  with  any  kind  of  social  life. 
Even  among  savages  that  live  by  hunting  or  fishing,  the 
system  of  absolute  economic  independence  is  never  entirely 
realized.  And  in  present-day  society  what  an  extraordinary 
distribution  of  wealth  would  result  if  we  should  tell  the 
baker  who  has  produced  a  thousand  loaves  of  bread,  or  the 
shoemaker  who  has  made  a  hundred  pairs  of  shoes  that  he 
had  better  keep  them  as  his  share  of  the  social  product. 

Professor  Stanley  Jevons  has  compared  the  productive 
process,  in  which  so  many  elements  are  combined,  to  the 
kitchen  where  Macbeth's  three  witches,  in  preparing  their 
infernal  compound,  throw  into  their  cauldron  the  most 
heterogeneous  substances.  By  what  subtle  analysis  shall  we 
succeed  in  distinguishing  the  share  that  each  one  has  contrib- 
uted to  the  social  product?  In  all  civilized  societies  each 
individual  is  constantly  selling  or  buying  goods,  and  selling 

421 


422  PRINCIPLES   OF   POLITICAL   ECONOMY 

or  employing  services  which  are  offered  for  sale,  and  thus 
ceaselessly  influencing  the  amount  and  the  nature  of  social 
wealth.  Constantly  wealth  is  being  consumed  or  withdrawn 
from  circulation ;  constantly  wealth  is  being  produced  and 
put  in  circulation.  The  whole  question  of  distribution  is 
to  discover  whether  each  person  withdraws  from  the  social 
product  a  value  equivalent  to  that  which  he  contributes. 

The  classical  economists  answer  this  question  affirmatively. 
They  hold  that  in  a  society  based  on  the  liberty  of  labor  and 
the  absolute  freedom  of  contract,  (aside  from  those  defects 
that  are  inseparable  from  all  human  institutions,)  every 
one  receives  the  just  and  exact  equivalent  of  the  wealth  he 
creates.  They  admit  that  this  is  not  entirely  the  case  in  our 
present  industrial  system  ;  but,  the}7"  declare,  the  defects  of 
the  present  system  are  due  to  protection,  legal  monopolies, 
and  government  interference  of  all  sorts. 

The  classical  economists  explain  the  distribution  of  wealth 
as  follows  :  Each  of  us  offers  for  sale  the  commodities  he  pos- 
sesses. The  farmer  offers  the  crop  taken  from  his  land,  the 
manufacturer  offers  the  products  of  his  shop  or  factory,1  and 
the  man  who  owns  neither  land  nor  capital  offers  his  muscu- 
lar strength  or  his  intelligence.  These  products  or  services 
are  sold  at  a  price  fixed  on  the  market  by  the  law  of  supply 
and  demand  ;  which  amounts  to  saying  (if  we  recall  the 
explanation  of  value  given  on  page  64)  that  they  are  sold 
at  a  high  or  low  price  according  to  the  intensity  of  the  desire 
felt  by  the  public  for  these  goods  or  services.  Hence  the 
public,  by  the  value  which  it  attributes  to  our  products  or 
our  services,  and  the  price  which  it  consents  to  pay  for 
them,  determines  the  share  that  each  of  us  shall  receive. 
This  price,  known  as  wages,  or  as  salary,  or  as  rent,  or  as 
selling-price  for  whatever  commodity  we  offer,  constitutes 
our  income. 

1  It  is  perhaps  unnecessary  to  point  out  that  the  expressions  :  his  land, 
his  factory,  already  imply  the  existence  of  private  property,  which,  as  ~we 
shall  see  presently,  itself  requires  justification. 


THE   CLASSICAL   IDEA   OF   DISTRIBUTION  423 

Is  it  not  in  conformity  with  social  utility  and  even  with 
justice  that  the  goods  which  are  most  desired  and  which  are 
most  rare,  i.e.  which  satisfy  the  most  pressing  wants  of  society 
and  which  are  not  sufficient  in  quantity  entirely  to  satisfy 
these  wants,  should  possess  the  greatest  value  ?  Does  not  the 
law  of  demand  and  supply,  which  regulates  this  value,  secure 
to  each  person  the  equivalent  of  the  product  that  he  has  made 
or  the  service  that  he  has  rendered  ?  And  is  not  this  equiv- 
alent value  measured  in  the  most  impartial  and  the  least 
arbitrary  manner  by  exchange  in  the  open  market,  i.e.  by 
means  of  free  contract  ?  Does  not  the  public,  by  paying  a 
high  price  for  my  products  and  a  low  price  for  yours,  thus 
indicate  the  degree  of  importance  or  of  social  utility  which 
it  ascribes  to  our  respective  products  or  labors  ?  One  may 
object  that  the  public  is  not  a  competent  judge  of  this 
importance  and  utility.  But  who,  then,  could  possibly  be  a 
better  judge  than  the  person  who  consumes  our  products  or 
employs  our  services  ? 

The  classical  economists  point  out,  moreover,  that  compe- 
tition always  tends  to  correct  any  inequalities  or  injustices 
that  may  arise.  For  if  it  should  happen  that  my  products 
or  my  services  bring  an  excessive  price  and  great  profits,  a 
horde  of  rivals  who  are  eager  to  make  similar  excessive 
profits  will  immediately  engage  in  the  same  industry  or  pro- 
fession as  mine,  and  will  soon,  by  increasing  the  supply  of 
these  products  or  services,  reduce  their  value  to  the  level  of 
the  cost  of  production.  Thus  the  value  of  every  commodity 
tends  to  be  regulated  by  the  trouble  and  expense  necessary 
to  produce  it.  Could  any  better  rule  than  this  be  devised 
to  determine  distribution  ? 


II.    Why  this  System  of  Distribution  does  not  seem  Just 

Such  is  the  classical  explanation  and  justification  of  the 
present  distributive  process.  As  a  scientific  explanation  of 
what  takes  place,  it  is  good.  But  as  a  justification,  it  is 


424  PRINCIPLES    OF   POLITICAL   ECONOMY 

poor ;  and  as  such,  it  is  in  fact  not  wholly  devoid  of  irony. 
Take,  for  example,  a  miner  who  gets  $2  a  day  or  25  cents  an 
hour  to  extract  coal ;  consider,  on  the  other  hand,  a  celebrated 
pianist  like  Paderewski,  who  receives  as  much  as  12500  for 
playing  two  or  three  selections  at  a  concert.  If  we  ask 
why  the  musician  is  paid  ten  thousand  times  as  much  as 
the  workman,  the  disciples  of  Bastiat  would  unhesitatingly 
reply  :  "  Because  the  former  renders  society  a  service  ten 
thousand  times  greater  than  the  latter  ;  and  the  proof  of 
this  is  that  society  is  willing  to  pay  ten  thousand  times  as 
much  for  it.  Society  may  be  mistaken,  but  we  cannot  esti- 
mate the  value  of  services  except  by  the  price  that  society 
attributes  to  them."1 

If  this  be  true,  we  must  admit  that  the  products,  services, 
and  labors  that  are  most  useful  to  mankind,  —  from  the  work 
of  the  humblest  manual  laborer  up  to  that  of  some  inventive 
genius  who  probably  died  of  hunger,  —  may  possess  almost 
no  exchange  value.  On  the  other  hand,  such  labors  or  such 
acts  (for  often  they  do  not  deserve  the  name  of  labor)  as 
provide  the  most  fugitive  or  perhaps  the  most  immoral  pleas- 
ures may  be  purchased  at  extravagant  prices,  and  make  the 
fortunes  of  those  that  sell  them.  It  must  furthermore  be 
admitted  that  all  this  is  the  inevitable  and  natural  conse- 
quence of  the  law  of  value  as  we  have  explained  it.  But  we 
must  hasten  to  add  that  inasmuch  as  the  law  of  value  is  a 
natural  law,  it  is  also  unmoral ;  that  is  to  say,  it  has  nothing 
to  do  with  the  question  of  justice  or  injustice  and  is  as  little 
concerned  with  moral  principles  as  any  other  natural  law. 
The  law  of  value  is  in  this  respect  like  the  law  of  gravita- 
tion, or  like  the  law  that  "  maketh  the  sun  to  rise  on  the  evil 
and  on  the  good,  and  sendeth  rain  on  the  just  and  on  the 
unjust."2 

1  In  this  connection  we  are  reminded  of  the  reply  that  a  well-known  singer 
once  made  to  the  Empress  Catherine  when  the  latter  complained  that  the 
artist  asked  for  higher  pay  than  that  of  a  Russian  Marshal.     "Very  well 
then,"  retorted  the  singer,  "get  your  marshal  to  sing  for  you." 

2  The  writer  of  the  Dutch  translation  of  this  book,  Mr.  Herckenrath,  re- 


FREE    COMPETITION    PARTLY    HYPOTHETICAL  425 

When  an  English  lord  owning  large  sections  of  London 
permits  contractors  to  build  houses  on  his  land  on  condition 
that  they  shall  pay  a  ground  rent,  which  is  raised  at  each 
renewal  of  the  lease  because  of  the  increased  value  of  land 
and  of  houses,  we  may  readily  admit  that  his  remuneration, 
which  amounts  perhaps  to  millions,  is  naturally  determined 
by  the  law  of  supply  and  demand.  But  we  cannot  readily 
see  in  what  respect  this  remuneration  is  proportionate  to  the 
"service  rendered"  by  the  "landlord.''  Or,  if  some  one 
should  insist  upon  designating  as  a  service  the  fact  of  having 
given  permission  to  people  to  reside  in  the  centre  of  London, 
it  is  difficult  to  perceive  by  virtue  of  what  principle  of  justice 
or  social  usefulness  the  noble  lord  has  been  invested  with 
the  agreeable  privilege  of  rendering  his  fellow-mortals  a  ser- 
vice that  is  so  dearly  paid. 

Finally,  as  regards  the  classical  hypothesis  of  a  regime  of 
absolute  liberty,  in  which  competition  acts  as  a  corrective  and 
constantly  keeps  the  price  of  things  at  the  level  of  the  cost 
of  production,  we  must  declare  that  this  hypothesis  never 
holds  true  entirely.  The  law  of  free  competition  never 
operates  fully  or  perfectly.  The  examples  that  we  have 
given  above  are,  to  be  sure,  cases  of  monopolies  ;  but  they 
are  by  no  means  exceptional.  Almost  all  large  fortunes  owe 
their  origin  to  some  element  of  actual  monopoly,  or,  to  speak 
with  more  exactitude,  some  element  of  rent.  We  shall  note 
later  on  that  the  name  rent  is  applied  to  those  cases  in  which, 
because  of  some  element  of  inequality  in  the  conditions  of 
production,  the  law  of  competition  does  not  produce  its  nor- 
mal effect  of  bringing  exchange  value  to  the  level  of  the  cost 
of  production.  Now  the  cases  of  rent,  which  economists 

marks  that  these  injustices  of  the  law  of  value  are  due  particularly  to  the 
fact  that  our  appreciations  or  estimates  of  value  are  unjust,  and  that  the 
progress  of  the  moral  education  of  mankind  may  change  these  appreciations 
and  make  them  conform  more  closely  to  the  idea  of  justice.  This  is  quite 
possible.  We  have  not  said  that  the  law  of  value  is  immoral,  but  that  it  is 
unmoral.  If  all  men  should  become  just  and  righteous,  the  law  of  values 
would  also  be  just  and  righteous. 


426  PRINCIPLES   OF   POLITICAL   ECONOMY 

formerly  regarded  as  confined  to  the  revenue  due  to  differ- 
ences in  the  fertility  and  accessibility  of  land,  are  to-day 
conceded  to  extend  to  almost  every  kind  of  income. 

But  although  we  abandon  the  optimistic  doctrine  that 
regards  the  present  distribution  of  wealth  as  in  perfect  har- 
mony with  our  ideals  of  justice,  we  must  nevertheless  admit 
that  the  present  method  of  distribution,  founded  on  free 
competition  and  the  law  of  demand  and  supply,  accomplishes 
fairly  well  two  things  which  are  of  capital  importance,  and 
without  which  we  could  scarcely  get  along  :  — 

First)  it  stimulates  productive  activity.  The  amazing  ac- 
cumulation of  wealth  that  marks  our  own  epoch  is  sufficient 
to  convince  us  of  this.  Theoretically,  moreover,  what  better 
method  could  be  conceived  for  raising  individual  activity  to 
a  maximum  than  to  say  to  everybody:  "Do  whatever  you 
can  or  whatever  you  wish.  What  you  produce  will  belong 
to  you.  Try  to  make  the  best  use  of  it.  If  your  share  of 
the  social  product  is  large,  so  much  the  better  for  you ;  if  it 
is  small,  so  much  the  worse."  l 

Perhaps  it  may  even  be  said  that  the  present  economic 
system  offers  too  great  a  stimulus  to  the  pursuit  of  wealth, 
and  that  from  the  ethical  point  of  view  it  might  be  desirable 
to  substitute  a  less  intensely  stimulating  economic  regime. 
(See  page  114.)  But  we  must  not  overlook  the  fact  that 
even  in  the  wealthiest  of  our  modern  societies,  an  equal 
division  of  wealth  would  mean  only  a  small  share  for  each 
member  of  society.  It  would  therefore  be  imprudent  or  at 
least  untimely  to  adopt  a  system  of  distribution  that  would 
curtail  production.  What  would  be  the  good  of  distributing 
wealth  more  equally,  if  all  men  were  thus  made  poorer  than 
they  are  now  ? 

Secondly,  it  violates  no  one's  right  of  free  initiative.     The 

1  Socialists  do  not  deny  that  the  present  "capitalistic"  system  has  in- 
creased our  productive  energies  enormously.  They  even  emphasize  the  fact 
that  this  system  will  perish  precisely  because  of  so-called  overproduction. 


PRESENT   DISTRIBUTION   IS   SPONTANEOUS  427 

distributive  process,  founded  on  free  competition  and  on  the 
law  of  demand  and  supply,  does  not  call  for  the  intervention 
of  a  distributive  authority  ;  the  legislator  is  not  asked  to 
make  the  division  of  wealth,  since  everybody  determines  his 
own  share  by  creating  it.  If  the  government  must  intervene, 
it  should  be  only  to  check  any  possible  disturbances  of  the 
economic  mechanism,  not  to  put  it  in  motion.  The  economic 
forces,  as  we  have  explained,  are  adjusted  automatically, 
spontaneously.  This  is  a  great  superiority,  which  no  other 
system  appears  to  possess,  not  even  those  that  are  theoreti- 
cally perfect.  Admitting  for  a  moment  that  we  might  dis- 
cover the  ideal  rule  of  distributive  justice,  could  this  ideal 
rule  be  made  to  operate  of  itself  and  by  its  own  agency  ? 
Would  it  not  require  the  intervention  of  some  authority  to 
apply  it  and  to  give  to  each  participant  in  production  his 
share  of  the  proceeds,  just  as  a  mother  gives  each  of  her 
children  a  piece  of  pie  as  large  as  each  of  them  deserves  ? 
Would  not  the  authoritative  regulation  of  distribution  neces- 
sarily involve  the  regulation  of  production  and  labor  also  ? 
If  the  authority  charged  with  the  task  of  distribution  meas- 
ured out  every  one's  share  of  the  social  product  when  the  day 
of  reckoning  comes,  could  it  during  the  rest  of  the  time 
let  everybody  work  or  loaf  at  his  own  pleasure?  It  must 
be  admitted  that  this  is  extremely  unlikely.1 

It  must  not  be  forgotten,  moreover,  that  although  justice 
is  very  precious,  nay,  inestimable,  — fiat  justitia,  ruat  coelum  ! 
—  yet  there  are  other  very  precious  and  noble  things ;  and 
one  of  these  is  liberty.  It  would  be  too  dear  a  price  to  pay 

1  It  is  true  that  under  the  present  system  the  right  of  free  initiative,  though 
granted  by  law  to  all,  really  exists  only  for  those  who  possess  capital.  The 
wage-worker,  who  is  a  mere  "private"  in  the  ranks  of  the  industrial  army, 
has  little  initiative  or  choice.  Nevertheless,  for  a  minority  that  is  increasing 
and  whose  numbers  we  may  hope  will  still  further  increase,  this  free  initiative 
does  exist  in  various  degrees  at  the  present  time.  Is  it  likely  that  any  system 
of  socialism  or  collectivism  would  secure  liberty  and  free  initiative  to  a  greater 
number?  Would  socialism  not  be  likely  to  withdraw  it  from  the  minority 
that  now  enjoy  it  ? 


428  PRINCIPLES    OF   POLITICAL    ECONOMY 

for  a  more  equitable  distribution  if  we  were  obliged  to  sacri- 
fice liberty  to  obtain  it.  Indeed,  of  what  use  would  a  better 
distribution  be,  if  men  could  secure  it  only  under  a  system 
of  quasi-slavery  ? 

The  problem  may  therefore  be  expressed  in  these  terms: 
How  shall  we  apply  principles  of  justice  to  the  distribution 
of  wealth  without  curtailing  production  and  without  sacri- 
ficing (but  rather  by  developing)  individual  initiative  and 
liberty?  To  accomplish  this  is  certainly  not  impossible. 
Whatever  the  present  state  of  this  world  of  ours  may  be, 
and  whatever  defects  we  may  discover  in  it,  it  at  least  does 
not  possess  the  defect  of  being  unchangeable;  it  is  con- 
stantly being  transformed,  and  no  one  with  an  unbiassed 
judgment  can  maintain  that  it  is  changing  for  the  worse. 

III.   The  Origin  of  the  Right  of  Property 

In  civilized  societies  the  right  of  individual  or  private 
property  is  the  mainspring  of  the  whole  mechanism  of  distri- 
bution. It  sets  all  in  motion.  But  it  is  also  the  point  of 
attack  for  all  schools  of  socialism.  We  are  therefore  led  to 
ask :  What  is  the  right  of  private  property  ? 

The  classical  economists,  and  even  Pope  Leo  XIII,  in  his 
encyclical  letter  entitled  De  conditione  opificum,  define  it  as  a 
man's  right  to  the  product  of  his  own  toil.  Hence  they 
regard  it  as  realizing  the  formula,  "each  shall  receive  the 
product  of  his  labor,"  or,  at  least,  "  each  shall  receive  the 
value  produced  by  his  labor."  Man  would  thus  be  the  owner 
of  all  things  created  by  his  own  activity,  and  his  posses- 
sions would,  in  a  sense,  be  the  legitimate  extension  of  his 
own  personality.  But  the  man  who  should  attempt  to  make 
a  practical  application  of  this  formula  would  be  singularly 
disappointed.  Let  us,  for  example,  make  an  inventory  of  a 
man's  possessions,  and  question  him  with  regard  to  the 
source  of  his  property  :  "  Is  this  house  the  product  of  your 
labor  ?  "  The  answer  would  probably  be,  "  No ;  it  came  to 


OCCUPANCY  UNDERLIES   PRIVATE   PROPERTY  429 

me  from  my  parents."  —  "Did  your  labor  produce  this  forest 
and  these  fields  ?  "  "  No ;  they  are  not  the  product  of  any 
one's  labor."  —  "Are  these  goods  which  fill  your  storehouses, 
or  these  crops  in  your  barn,  the  product  of  your  labor?" 
"No;  they  were  produced  by  my  employees."  If  all  this 
be  true,  what,  then,  is  the  use  of  the  definition  given  above? 

Lawyers  have  been  more  accurate  and  more  cautious. 
They  define  the  right  of  private  property  simply  by  its  attri- 
butes, without  attempting  to  justify  it.  They  regard  it  as 
the  right  exerted  over  a  thing  by  one  person  to  the  exclusion 
of  every  one  else.  The  usual  definition  of  property  is  to 
the  effect  that  it  confers  the  possession,  use,  disposal,  and 
enjoyment  of  a  thing.  There  is  no  mention  of  labor  in  these 
definitions,  and,  from  the  legal  point  of  view,  this  omission 
is  perfectly  logical.  In  antiquity,  labor  could  not  possibly 
have  been  regarded  as  a  method  of  acquiring  property,  be- 
cause labor  was  almost  entirely  slave  labor.  Even  to-day, 
labor  of  itself  involves  only  the  acquisition  of  wages,  not  of 
property.  The  laborer  can  obtain  property  only  indirectly ; 
that  is,  by  purchasing  it  with  his  wages. 

In  most  legal  systems,  occupancy  ordinarily  is  regarded  as 
the  primary  fact  underlying  the  right  of  property.  This 
is,  in  fact,  the  truth;  for,  as  has  been  well  said,  "appro- 
priation precedes  production,  both  historically  and  logically. 
Primitive  races  regarded,  and  often  now  regard,  appropriation 
as  the  best  title  to  property.  .  .  .  Priority  of  appropria- 
tion is  the  only  title  of  right  which  can  supersede  the  title 
of  greater  force."  l  Nevertheless,  as  occupancy  figures  only 
at  the  origin  of  property,  and  as  it  is  not  possible,  in  the  veri- 

1  W.  G.  Sumner,  "What the  Social  Classes  owe  to  Each  Other,"  page  68. 
Concerning  this  same  matter,  President  Hadley  says,  in  his  "Economics"  : 
"  The  earliest  property  rights  were  based  on  occupancy  rather  than  on  labor. 
They  were  a  recognition  of  the  power  of  the  strong  man  to  retain  what 
he  had  seized,  not  of  the  right  of  the  industrious  man  to  enjoy  what  he  had 
produced.  We  may  fairly  grant  the  claim  of  the  socialist,  that  capital  origi- 
nated in  robbery.  In  like  manner,  labor  originated  in  slavery." 

In  antique  societies  occupancy  was  itself  founded  on  conquest.     The  type 


430  PRINCIPLES   OF   POLITICAL   ECONOMY 

fication  of  property  claims,  to  go  back  to  the  beginning,  it 
may  be  said  that  property  is  usually  based  on  prescription, 
i.e.  on  immemorial  or  long-continued  and  uninterrupted 
possession.  But  prescription,  like  simple  occupancy,  is  only 
actual  possession,  and  is  devoid  of  any  justificative  ethical 
value. 

We  must  therefore  simply  regard  private  property  as  a 
historical  fact.  We  shall  most  easily  discover  its  nature  by 
considering  its  attributes,  and  the  objects  which  may  become 
private  property. 

The  present  organization  of  society  cannot  be  regarded  as 
the  logical  development  of  an  a  priori  principle.  It  is  a 
product  of  history,  the  culmination  of  a  series  of  very 
complex  facts,  of  which  some  are  more  or  less  in  accord- 
ance with,  and  others  more  or  less  contrary  to,  our  idea  of 
abstract  justice.  There  is,  at  the  basis  of  private  property 
as  at  present  constituted,  an  almost  hopeless  entanglement 
of  occupation  and  conquest,  customs  and  laws,  labor  and 
saving.1 

IV.    The  Evolution  of  the  Right  of  Property,  with  Regard 

to  its  Object 

At  the  present  time  all  wealth  that  can  be  appropriated  — 
which  excludes  the  air,  the  sea,  running  waters — may 
become  the  object  of  private  property  rights.  In  civilized 
communities  almost  all  wealth  constitutes  some  one's  private 
property.  This,  however,  has  not  always  been  the  case. 
There  was  a  time  when  the  scope  of  private  property  was 
confined  to  a  few  objects.  There  is  no  doubt  that  at  first  it 
comprised  only  those  kinds  of  wealth  that  in  civilized  coun- 

of  quiritarian  property  at  Eome  was  that  which  had  been  acquired  sub  hasta, 
i.e.  by  the  lance. 

1  The  extremely  close  relation  between  law,  especially  the  law  of  property 
and  economic  organization,  has  been  emphasized  by  Karl  Marx  and  most 
scientifically  studied  by  Rodbertus  and  by  Professor  Adolf  Wagner,  of  the 
University  of  Berlin.  (See  the  latter's  "  Grundlegung  der  politischen  CEkono- 
mie,"  zweiter  Theil.) 


THE   THINGS   THAT   WERE   PROPERTY  431 

tries  have  long  ago  ceased  to  be  the  object  of  property 
rights,  namely,  slaves  and  women.  It  also  included  objects 
of  immediate  personal  use,  —  such  as  jewels,  weapons,  horses, 
—  the  individual  ownership  of  which  was  evidenced  by  the 
custom  of  burying  them  with  their  owner  in  his  tomb  ;  in- 
deed, slaves  and  women  were  often  treated  similarly. 

Later,  property  came  to  include  the  home,  —  not  as  in- 
dividual property,  but  as  family  property,  —  because  the 
home  was  the  abiding-place  of  the  household  gods,  and  these 
gods  belonged  to  the  family.1  Still  later,  it  extended  to  a 
portion  of  the  land,  and  first  of  all  to  the  land  in  which  the 
ancestors  were  buried  (because  the  ancestors  were  also  a  kind 
of  family  property).  But,  despite  these  beginnings,  private 
property  in  land  —  the  most  important  and  almost  the  sole 
wealth  of  the  ancients  —  was  established  very  gradually.2 
When  we  take  up  the  study  of  land-rent  we  shall  see  how  land 
in  turn  came  to  be  regarded  as  an  object  of  the  right  of  prop- 
erty. In  fact,  even  now,  not  all  land  has  been  appropriated ; 
unowned  areas  are  at  the  present  time  being  brought  under 
the  dominion  of  property  rights  by  way  of  colonization,  oc- 
cupancy, and  preparation  for  cultivation.  But  the  time  is 
not  far  distant  when  private  property  will  extend  over  the 
whole  earth,  and  to  all  objects  that  are  capable  of  being 
appropriated. 

Different  kinds  of  property  have  successively  played  a  domi- 
nant part  in  the  history  of  mankind.  Among  pastoral  tribes, 
cattle  is  the  most  important  property;  under  feudalism, 
land ;  and  in  the  era  of  steam,  coal  mines.  Private  property 

1  Consult  Coulanges,  "  The  Ancient  City." 

2  "  Private  possession,  beginning  with  movables,  extends  itself  to  immova- 
bles only  under  certain  conditions.     We  have  evidence  of  this  in  the  fact 
named  by  Mayer  that  the  Hebrew  language  has  no  expression  for  landed 
property  ;  and  again  in  the  fact  alleged  by  Mommsen  of  the  Romans  that 
the  idea  of  property  was  primarily  associated  not  with  immovable  estate  but 
with  estate  in  slaves  and  cattle  (familia  pecunia  que)"  —  HERBERT  SPEN- 
CER, "Sociology,"   Part  V.     The  word  mancipatio  evidently  presupposed 
some  movable  object. 


432  PRINCIPLES   OF   POLITICAL  ECONOMY 

has,  in  our  own  times,  been  extended  to  a  multitude  of  new 
objects  of  which  our  ancestors  knew  nothing.  Among  these 
are  :  (1)  So-called  invisible  property;  that  is,  credit  claims  or 
shares  in  the  stock  of  industrial  enterprises,  represented  by 
mere  pieces  of  paper  that  can  be  slipped  into  a  pocket-book, 
and  which  to-day  constitute  a  most  convenient  and  desirable 
kind  of  wealth ;  (2)  works  of  literature,  science,  and  art, 
which  have  become  the  object  of  property  under  the  name 
of  copyrights  and  patents. 

It  is  possible  that  in  the  future  individual  property  will 
adopt  forms  and  be  applied  to  objects  and  relations  of  which 
we  have  to-day  little  or  no  conception.1 


V.    The  Evolution  of  the  Right  of  Property,  with  Regard 
to  its  Attributes 

The  right  of  property  has  two  characteristic  attributes  : 
perpetuity  and  free  disposal.  Deprived  of  one  or  the  other 
of  these  characteristics,  it  becomes  only  the  right  of  posses- 
sion or  the  right  of  usufruct. 

The  perpetuity  of  a  property  right  evidently  means  that 
the  right  shall  last  as  long  as  the  object  to  which  it  extends. 
As  it  lies  in  the  nature  of  property  to  attach  to  some  con- 
crete object,  its  duration  is  measured  by  that  of  the  ob- 
ject itself,  and  not  by  that  of  the  proprietor.  There  are 
many  things  which  cannot  last  long  and  which  are  intended 
to  be  consumed  almost  immediately;  for  such  objects  as 
these,  the  right  of  ownership  will  be  ephemeral.  But  there 
are  also  objects  of  long  duration,  and  there  is  one  kind  of 
wealth,  —  land,  —  the'  duration  of  which  has  no  limits  save 
those  fixed  by  geological  conditions.  Hence,  the  right  of 
property  in  land  is  sui  generis,  and  involves  economic  conse- 
quences that  are,  as  we  shall  presently  see,  of  capital  im- 

*A  law  was  recently  passed  by  the  state  of  Connecticut,  entitled  "An 
Act  to  prevent  the  stealing  of  electricity."  Our  present  copyright  laws  are 
practically  laws  against  stealing  ideas. 


PERPETUITY   AND   INHERITABILITY  433 

portance.  There  are,  however,  other  objects  which,  by  means 
of  legal  ingenuity,  have  acquired  a  quasi-perpetuity ;  examples 
of  these  are  so-called  "  perpetual  government  loans." 

Inseparably  connected  with  the  perpetuity  of  the  right  of 
property  is  the  right  of  legacy  or  inheritance  ;  for  when  the 
owner  dies  and  the  object  continues  to  exist,  there  must  be 
some  one  to  take  his  place  as  master  of  it.  As  long,  of  course, 
as  property  is  vested  in  the  family  there  can  be  no  inter- 
ruption or  break  in  its  ownership;  for  the  family  consti- 
tutes a  moral  person  whose  existence  is  perpetual,  precisely 
like  the  modern  "  corporation,"  which  is  said  to  be  "  im- 
mortal." When,  in  the  early  history  of  law,  the  property  of 
the  family  passed  apparently  from  the  father  to  the  children, 
this  was  by  right  of  continuation  and  not  by  right  of  succession 
properly  speaking.  When  men  began  to  regard  property  as 
individual,  its  transfer  to  the  children  of  the  deceased  was 
expressly  provided  for  by  law  and  was  made  obligatory  upon 
the  parents  and  sometimes  upon  the  children.1  This  was 
merely  a  somewhat  altered  form  of  family  property;  often 
the  property  was  legally  transferred  to  the  nearest  relatives 
by  so-called  inheritance  ab  intestato. 

From  the  view-point  of  the  distribution  of  wealth,  the  per- 
petuity and  inheritability  of  property  result  in  the  owner- 
ship of  wealth  by  persons  who  have  not  produced  it,  —  wealth 
which  must  be  regarded  as  the  product  of  the  labor  of  their 
ancestors  in  a  more  or  less  obscure  past.  Thus  the  optimistic 
principle  that  everybody  gets  the  exact  equivalent  of  the 
product  of  his  own  labor  is  of  questionable  validity. 

The  other  essential  attribute  of  the  right  of  private  prop- 
erty is,  as  we  have  said,  the  right  of  free  disposal.  Roman 
law  put  this  forcibly  by  defining  the  right  of  property  as 
the  jus  utendi,  fruendi,  et  abutendi;  the  French  Civil  Code 
defines  it  as  "  the  right  to  enjoy  and  to  dispose  of  things  in  the 

1  Even  when  the  right  of  succession  ab  intestat  had  been  established  at 
Rome,  the  members  of  the  owner's  family,  who  were  called  upon  to  assume 
ownership,  were  designated  as  heredes  necessarii  (obligatory  heirs). 


434  PRINCIPLES   OF   POLITICAL  ECONOMY 

most  absolute  manner."  But  this  right  to  dispose  of  a  thing 
as  one  pleases,  which  confers  upon  ownership  an  absolute 
character  so  inherent  that  we  can  scarcely  conceive  of  own- 
ership without  it,  did  not  always  exist.  Ownership  has 
gradually  been  widened  in  its  connotation,  and  in  this  respect 
has  undergone  the  same  evolution  as  the  objects  of  property. 
From  the  legal  point  of  view,  the  claim  of  the  Romans  to 
glory  consists  in  having  first  given  the  right  of  property 
this  sovereign  attribute ;  it  was  subsequently  somewhat  at- 
tenuated, under  the  influence  of  Germanic  laws,  and  again 
introduced  into  those  systems  of  modern  law  which  were 
influenced  by  the  French  Revolution. 

So  far  as  we  can  conjecture,  the  order  in  which  the  right 
of  private  property  successively  acquired  its  essential  attri- 
butes was  as  follows  :  — 

(1)  Probably  the  first  property  right  was  that  of  exploiting 
one's  possessions,  that  is,  making  them  yield  something  for 
the  owner  by  means  of  the  labor  of  others,  —  formerly  by  the 
labor  of  slaves,  and  subsequently  by  the  labor  of  free  wage- 
workers  (employees).     This  was  originally  the  noble  attribute 
of  property,  inasmuch  as  it  dispensed  with  the  owner's  need 
to  work. 

(2)  The  right  of  gift,  at  least  in   the   case    of  movable 
objects,  seems  to  have  been  one  of  the  oldest  ways  of  making 
use  of  wealth  and  anterior  even  to  the  right  to  sell.     (See 
page  184.)    And,  indeed,  if  the  owner  has  the  right  to  consume 
a  thing  for  his  own  gratification,  why  should  he  not  have  the 
right  to  let  another  person  consume  it  ?     If  he  possesses  the 
right  to  destroy  it,  why  should  he  not  be  permitted  to  give  it 
away  ?     Is  not  the  noblest  and  most  enviable  privilege  con- 
nected with  ownership  the  right  to  confer  its  benefits  on 
others  ? 

(3)  The  rights  to  sell  and  to  rent  seem  to  have  sprung 
up  much  later.     In  the  fourth  century  before  Christ,  Aris- 
totle declared  that  these  were  necessary  attributes  of  the 
right  of  property ;  but  he  does  not  seem  to  imply  that  they 


SALE   NOT   ALLOWED   ORIGINALLY  435 

were  generally  recognized  at  that  time.  In  fact,  there  are 
many  reasons  why  they  should  not  have  been  recognized.  As 
long  as  property  was  vested  in  the  family  and  bore  the  imprint 
of  religious  consecration  —  and  this  was  the  marked  character- 
istic of  antique  property  —  the  transfer  of  ownership  was  not 
sanctioned;  at  all  events,  it  constituted  an  act  of  impiety  on 
the  part  of  any  member  of  the  family.  Moreover,  exchange 
and  the  division  of  labor  did  not  yet  exist ;  each  family 
sufficed  unto  itself ;  movable  objects  of  property  were  few  in 
number.  Hence  every  one  kept  these  objects  permanently ; 
sometimes  they  were  buried  with  the  owner.  Under  these 
circumstances,  sale  could  be  regarded  only  as  an  exceptional 
and  abnormal  act.  Accordingly,  when  sale  is  first  intro- 
duced, we  find  it  solemnized  by  extraordinary  ceremonies, 
and  partaking  of  the  nature  of  a  public  event.  By  the  law  of 
Rome,  mancipatio  (the  transfer  of  property),  had  to  take  place 
in  the  presence  of  five  witnesses  representing  the  five  .classes 
of  the  Roman  people.1 

(4)  The  right  to  bequeath,  which  has  always  been  regarded 
as  the  most  important  attribute  and  the  crowning  feature  of 
the  right  of  property,  (because  it  prolongs  this  right  beyond 
death),  was  even  slower  in  becoming  a  part  of  the  right  of 
property.2  This  right,  moreover,  came  into  conflict  with  the 
right  of  family  inheritability  to  which  we  have  already  re- 
ferred ;  and  it  obviously  could  not  have  been  recognized  until 
property  had  entirely  lost  its  family  character  and  become 
thoroughly  individual.  There  is  reason  to  believe  that  even 
at  Rome,  where  individual  property  was  ultimately  so  vigor- 
ously developed,  the  father  of  the  family  did  not  have  the 

1  The  same  is  true  in  Germanic  law.     The  Kipuarians  in  the  sixth  century 
required  that  sales  take  place  in  mallo,  i.e.  in  the  assembly  of  the  people. 

2  "  The  right  freely  to  bequeath  indicates  the  greatest  scope  ever  accorded 
to  individuals  in  the  history  of  civilization."  — MAINE,  "Ancient  Law." 

Many  modern  systems  of  law  provide  that  the  father  cannot  disinherit 
certain  relatives  —  especially  the  wife  and  children.  This  is,  of  course,  an  in- 
fringement on  the  right  of  absolutely  free  disposal,  and  is  evidently  another 
trace  of  the  old  family  conception  of  property. 


436  PRINCIPLES    OF   POLITICAL    ECONOMY 

right  to  bequeath  until  the  establishment  of  the  Law  of  the 
Twelve  Tables  (450  B.c).1  The  solemnity  which  accompanied 
the  act  of  bequest  clearly  indicates  that  it  was  not  an  every- 
day performance. 

When  the  right  of  property  has  acquired  these  four  charac- 
teristics, it  may  be  regarded  as  complete,  and  then  it  con- 
stitutes the  very  basis  of  distribution. 

Inheritability,  gift,  and  legacy,  taken  together,  make  it 
possible  to  possess  wealth  without  having  performed  any 
labor.  They  facilitate  its  transmission  to  those  who  have 
not  worked  for  it.  On  the  other  hand,  the  right  of  property 
creates  a  class  of  "  disinherited."  In  the  course  of  time,  and 
as  the  result  of  accumulation  by  inheritance,  it  increases  the 
economic  inequalities  among  men. 

The  power  to  lend,  to  lease,  or  to  rent  property,  gives  rise 
to  a  division  of  society  into  two  classes — -creditors  and 
debtors  —  whose  conflicting  interests  are  a  menace  to  social 
peace  and  order.  It  results  in  the  creation  of  a  new  way 
to  live  without  working,  viz.  living  on  an  "independent 
income." 

The  right  to  utilize  property  exploitatively,  i.e.  to  employ 
other  persons,  gives  rise  to  another  division  of  society  into 
two  classes :  that  of  wage-workers,  who  labor  in  the  service 
of  others,  and  that  of  employers,  who,  in  appearance  at  least, 
appropriate  part  of  that  which  is  produced  by  the  laborers  in 
their  employ.  Thus  the  right  of  private  property  insidiously 
prepares  the  way  for  the  conflict  between  labor  and  capital. 

The  right  to  sell,  finally,  transforms  the  ownership  of  the 
product  into  the  ownership  of  the  value  of  the  product.  (See 
page  184.)  This  attribute  of  private  property  subjects  it  to 
all  the  fluctuations  of  demand  and  supply,  all  the  unfortunate 
or  fortunate  whims  and  fancies  of  public  taste  and  fashion, 
all  the  contingencies  of  the  market ;  property,  in  a  word, 

1  According  to  De  Coulanges,  the  right  to  choose  heirs  dates,  in  Athens, 
from  the  time  of  Solon  (sixth  century  B.C.),  and  in  Sparta  only  from  the 
beginning'of  the  fourth  century  before  Christ. 


THE  INEQUALITY   OF   WEALTH  437 

acquires  that  conditional,  instable,  doubtful  form  which  char- 
acterizes wealth  in  modern  society.     (See  page  47.) 

Three  of  these  effects  of  the  right  of  private  property 
appear  particularly  objectionable  from  the  standpoint  of 
social  justice.  The  first  is  the  extreme  inequality  of  wealth. 
The  second  is  the  right  to  be  idle;  this  right  is  possessed 
only  by  the  favored  few,  and  is  a  consequence  of  inheritance 
and  independent  income.  The  third  is  pauperism.  Let  us 
examine  these  three  objectionable  consequences  of  the  right 
of  private  property. 

VI.  The  Inequality  of  Wealth 

The  inequality  of  wealth  has  ever  led  the  poor  to  com- 
plain bitterly ;  and  their  enmity  for  the  rich,  as  old  as  the 
world  itself,  has  given  rise  to  socialism.  Without  doubt 
this  state  of  affairs  is  due  partly  to  an  unworthy  feeling 
of  envy,  which  is  natural  to  man,  and  which  makes  him 
impatient  of  superiority  in  his  fellow-creatures,  whether  that 
superiority  be  one  of  talent,  character,  beauty,  intelligence, 
or  even  of  health  or  virtue.  If,  however,  there  were  only 
this  element  in  class  hatred,  it  would  be  reasonable  to  hope 
that  some  day  education  and  moral  progress  will  ultimately 
destroy  it.  But  it  has  a  deeper  foundation  than  the  foolish 
sentiment  of  envy ;  namely,  the  feeling  of  violated  justice. 
This  feeling,  moreover,  deepens  and  increases  with  our 
growing  knowledge  of  moral  laws. 

Numerous  attempts  have  been  made  to  reach  a  statistical 
statement  of  the  inequality  of  wealth  and  of  incomes.  Mr. 
Thomas  G.  Shearman  1  estimates  that  in  the  United  States 
1.4  per  cent  of  the  population  own  70  per  cent  of  the  wealth; 
9.2  per  cent  of  the  population  own  12  per  cent  of  the  wealth, 
and  89.4  per  cent  of  the  population  own  only  18  per  cent  of 
the  wealth. 

Somewhat  more  official  is  the  estimate  of  Mr.  G.  K. 
1  In  the  Forum  for  1889  and  1891. 


438  PRINCIPLES    OF    POLITICAL    ECONOMY 

Holmes,  expert  on  wealth  statistics  for  the  Tenth  Census. 
Mr.  Holmes  found  that  0.3  per  cent  of  the  people  own  20 
per  cent  of  the  wealth;  8.97  per  cent  of  the  people  own  51 
per  cent  of  the  wealth,  and  91  per  cent  of  the  people  own 
only  29  per  cent  of  the  wealth.1 

The  Massachusetts  Labor  Bureau  reported  in  1894  that 
estates  of  150,000  and  over  aggregate  55  per  cent  of  the  total 
amount  of  property,  while  estates  of  less  than  $5000  aggre- 
gate but  11  per  cent.  Another  authority,  Dr.  C.  B.  Spahr,2 
reaches  the  conclusion  that  whereas  less  than  half  the  fami- 
lies in  America  are  property  less,  seven-eighths  of  the  families 
hold  but  one-eighth  of  the  national  wealth,  and  one  per  cent 
of  the  families  hold  more  than  all  the  rest. 

The  state  of  affairs  in  Great  Britain  is,  according  to  the 
same  writer,  even  worse  from  the  viewpoint  of  an  equal  dis- 
tribution of  wealth.  Nearly  6,000,000  families,  or  more  than 
three-fourths  of  the  people  of  Great  Britain  and  Ireland, 
have  no  registered  property  whatever.  They  have,  indeed, 
their  household  goods,  but  the  total  value  of  these  can  hardly 
exceed  1500,000,000.  Less  than  2  per  cent  of  the  families 
hold  about  three  times  as  much  private  property  as  all  the 
remainder  ;  and  93  per  cent  of  the  people  hold  less  than 
8  per  cent  of  the  accumulated  wealth. 

The  folloAving  circumstances  appear  to  justify  the  feeling 
that  social  justice  is  violated  :  — 

(1)  The  present  inequalities  of  wealth  do  not  appear  to  be 
natural,  but  artificial.  Unlike  physical,  mental,  and  moral 
inequalities,  differences  of  wealth  do  not  seem  to  be  gifts  of 
nature  that  we  cannot  change  for  better  or  for  worse,  but 
the  unforeseen  result  of  a  specific  social  organization  and  of 
economic  institutions  (such  as  property  and  inheritance) 
established  and  maintained  by  certain  social  classes. 

This  opinion  is  well  founded  as  far  as  antique  societies  are 

1  Political  Science  Quarterly  and  Journal  of  the  Eoyal  Statistical  Society. 

2  "The  Present  Distribution  of  Wealth  in  the  United  States,"  New  York, 
1896. 


NATURAL   INEQUALITIES  439 

concerned,  and  is  still  valid  with  regard  to  some  modern 
nations,  —  England,  for  example.  In  that  country  the  law 
(and  one  may  even  say  brute  force)  originally  placed  half 
the  soil  of  the  British  Isles  in  the  hands  of  a  few  hundred 
families,  and  forcibly  keeps  this  property  in  the  same  hands 
by  transferring  it  de  jure  to  the  oldest  son,  who  is  not  allowed 
to  sell  or  to  mortgage  his  estate,  and  who  is  obliged  (if  need 
be,  in  spite  of  himself)  to  retain  a  privileged  social  posi- 
tion whence  he  may  not  descend  and  to  which  others  are  not 
permitted  to  rise. 

But  it  is  not  true  in  democratic  countries  like  France, 
Switzerland,  and  the  United  States.  It  cannot  be  said  in 
these  countries  that  the  wealthy  are  made  rich  solely  by  the 
laws.  It  would,  to  be  sure,  be  absurd  to  go  to  the  other 
extreme  and  declare,  as  Franklin  did,  that  they  owe  their 
wealth  to  no  other  source  than  "labor  and  economy."  But 
it  must  be  admitted,  as  a  general  rule,  that  the  men  who  lay 
the  foundations  of  large  fortunes  possess  certain  exceptional 
qualities ;  these  uncommon  qualities  are  not  necessarily 
moral,  but  those  which  insure  victory  in  the  struggle  for  life. 

Only,  while  admitting  that  inequalities  of  wealth  are  gen- 
erally allied  with  natural  inequalities,  we  must  recognize 
that  the  former  are  infinitely  greater  than  the  latter.  Here, 
let  us  say,  is  a  man  who  is  "  worth,"  as  the  popular  expression 
puts  it,  $200,000,000 ;  *that  is  to  say,  at  least  20,000  times  as 
much  as  the  most  expert  workman.  Now  no  one  will  believe, 
not  even  the  millionnaire  himself,  that  he  is  20,000  times  as 
capable  as  the  workman.  If  there  were  some  device  for 
measuring  the  moral  and  intellectual  abilities  of  men,  it 
would  doubtless  be  easy  to  ascertain  that  these  abilities  are 
not  commensurate  with  the  inequalities  of  riches,  but  are 
often  entirely  different  from  them  in  degree.  There  is  no 
question  that  great  wealth  is  frequently  found  closely  allied 
with  the  possession  of  certain  qualities  of  initiative,  audacity, 
and  perseverance,  —  the  qualities  that  lead  to  triumph  in 
worldly  matters,  —  and  often  with  what  may  be  called  good 


440  PRINCIPLES   OF   POLITICAL   ECONOMY 

luck ;  but,  at  all  events,  this  wealth  is  by  no  means  pro- 
portionate to  the  "  painstaking,"  that  is,  to  the  conscious 
productive  effort,  of  the  owner.  On  the  contrary,  it  would 
appear,  as  John  Stuart. Mill  has  remarked  somewhat  bitterly, 
that  the  reward  declines  as  the  labor  becomes  more  painful, 
until  it  reaches  a  point  where  the  hardest  work  scarcely  sup- 
plies the  bare  needs  of  existence.  Still  less  do  these  ine- 
qualities seem  proportionate  to  the  merits  or  virtues  of  men. 
The  contrast  between  the  poor  honest  man  and  the  wicked 
but  happy  rich  man  is  a  commonplace  that  dates  back  to  the 
time  of  Job,  but  is  as  striking  to-day  as  ever. 

(2)  Natural  inequalities  harm  no  one.  Intelligence  and 
beauty  are,  in  those  that  possess  them,  not  attributes  of 
which  others  have  been  deprived ;  nor  does  their  possession 
by  the  few  make  others  either  stupider  or  uglier.  It  is  held, 
on  the  other  hand,  that  the  wealth  of  the  rich  is  created  ly 
plundering  the  poor.  The  whole  effort  of  modern  socialism 
is  directed  toward  the  demonstration  of  this  thesis. 

We  do  not,  however,  regard  it  as  well  founded.  To  be 
sure,  we  cannot  deny  that  all  great  fortunes  are  created  by 
taking  a  part  of  the  proceeds  of  the  labor  of  others.  But  we 
shall  see  presently  that  this  appropriation  is  not  necessarily 
robbery.  Although  too  many  fortunes  are  based  on  robbery, 
there  are  less  of  them  now  than  in  antique  societies,  when 
the  conquest  of  land  and  the  custom  of  slave  labor  —  two 
aspects  of  robbery  —  were  regarded  as  the  normal  source 
of  all  riches. 

But  it  is  nevertheless  true  that  economic  inequalities  are 
much  more  pronounced  than  natural  inequalities,  and  their 
social  consequences  more  far-reaching  for  good  or  for  evil. 
Economic  inequalities  involve  a  whole  series  of  other  ine- 
qualities, which  make  us  feel  them  more  keenly  and  which 
greatly  increase  their  importance ;  they  ultimately  constitute 
the  dominating  influence  in  the  physical,  political,  intellec- 
tual, artistic,  religious,  and  moral  life  of  society. 

Statistics  show  that  the  average  duration  of  life  is  twice 


THE  ADVANTAGES   OF   WEALTH  441 

as  great  among  the  rich  classes  as  among  the  poor  and  that, 
by  a  cruel  irony  of  fate,  the  poorer  a  man  is,  the  greater  is 
the  tribute  that  he  must  pay  to  disease  and  death.1  Nor 
is  this  the  worst  result  of  poverty.  The  poorer  a  man  is,  the 
greater  the  temptation  to  vice  and  criminality.  Statistics 
show  that  the  criminality  of  the  poorer  classes  is  greater  than 
that  of  the  well-to-do.  Modern  science  has  entirely  exploded 
the  old  saw  that  poverty  goes  hand  in  hand  with  health  and 
virtue.  The  poor  no  longer  have  even  this  consolation  ! 

Wealth  provides  its  fortunate  possessors  not  only  with 
gratification  of  all  kinds,  (that  would  be  a  matter  of  rela- 
tively small  importance,)  not  only  with  longer  life,  health, 
independence,  leisure,  and  refinement  (which  are  all  very 
important),  but  with  great  power  in  all  the  fields  of  human 
interest  and  activity.  "  Plutocracy  "  is  nothing  new;  but  it 

1  Professor  Leroy-Beaulieu,  in  his  book  on  "  La  Repartition  des  Richesses," 
attempts  to  develop  a  contrast,  a  sort  of  compensation,  between  the  evils 
that  result  from  indigence  and  those  due  to  disease  or  moral  suffering : 
"  What  is  the  number  of  indigents  when  compared  with  that  of  the  number 
of  human  beings  who  suffer  from  physical  infirmities,  and  incurable  or 
organic  diseases  like  scrofula  and  consumption  ?  What,  above  all,  is  their 
number  when  compared  with  the  still  greater  number  of  persons  who  are 
tormented  by  poignant  mental  suffering  ?  Indigence  is  certainly  an  evil,  but 
for  the  thoughtful  mind  it  is  one  of  the  lightest  and  least  general  evils  that 
afflict  civilized  society."  The  eminent  economist  forgets  that  poverty  is 
itself  a  cause  of  "poignant  mental  suffering,"  and  a  very  important  cause  of 
"  scrofula  and  consumption."  Fate  has  not  placed  these  two  classes  of  evils 
that  afflict  mankind  in  opposite  sides  of  the  balance,  but,  on  the  contrary, 
appears  to  have  placed  them  on  the  same  side.  Th^e  poor  quarters  of  our 
cities  contain  a  much  larger  proportion  of  consumptives  than  the  wealthy 
districts.  The  laborers'  sections  of  Paris,  for  instance,  have  ten  times  as 
many  consumptives  as  the  quarter  of  the  Chainps-Elyse'es. 

Numerous  statistical  calculations  made  in  England  indicate  that  the  aver- 
age duration  of  life  among  the  rich  classes  is  between  55  and  56  years,  whereas 
for  the  working  classes  it  is  as  low  as  28  years.  In  Paris  the  general  mor- 
tality in  the  rich  quarters  of  the  Champs-Elyse'es  is  10  per  thousand, 
and  in  the  Montparnasse  quarter  it  is  43  per  thousand.  In  London  the 
figures  are  still  worse:  the  Board  of  Health  reports  that  the  mortality  varies 
from  11.3  per  cent  in  the  rich  residences  to  50  per  cent  in  the  homes  of  the 
very  poor. 


442  PRINCIPLES   OF   POLITICAL  ECONOMY 

seems  that  the  dynasties  of  our  so-called  "  steel  kings,"  "  cotton 
kings,"  and  "  coal  barons  "  tend  to  gain  possession  of  a  power 
greater  than  that  which  in  former  times  was  due  to  nobility 
or  courage,  or  that  which  in  modern  times  is  possessed  by 
men  of  learning  or  of  genius. 

In  the  domain  of  social,  political,  and  moral  influence, 
the  extraordinary  effects  of  the  possession  of  a  large  amount 
of  money  appear  so  entirely  incommensurate  as  to  be  ex- 
tremely objectionable. 

(3)  Finally,  this  inequality  of  wealth  becomes  more 
unbearable  when  we  consider  that  all  the  other  inequali- 
ties which  formerly  separated  men  are  gradually  being 
abolished.  Civil  equality  has  been  established  by  law ;  uni- 
versal suffrage  means  political  equality ;  the  wider  diffusion 
of  education  tends  even  to  establish  a  kind  of  intellectual 
equality.  Only  the  inequality  of  wealth  remains.  Whereas 
this  inequality  was  formerly  disguised,  so  to  speak,  by  other 
inequalities  of  a  higher  order,  to-day  it  stands  alone,  sharply 
denned,  and  naturally  arouses  widespread  antagonism. 

An  investigation  of  these  three  objections  does  not  lead 
to  the  conclusion  that  all  inequality  of  wealth  should  be 
abolished.  For,  in  the  first  place,  it  would  be  impossible  to  do 
this,  at  least  until  we  succeed  in  suppressing  those  natural 
ajid  innate  differences  between  individuals  of  which  the 
inequalities  of  wealth  are  simply  the  incommensurate  con- 
sequences. Nor,  in  the  second  place,  does  it  seem  desirable 
to  do  away  with  the  inequality  of  wealth,  at  least  until  human 
societies  have  entirely  traversed  the  progressive  and  experi- 
mental phase  of  their  development.  Economic  inequality 
acts  as  an  incomparable  stimulus  to  production.  It  keeps 
all  men  on  the  alert,  from  the  bottom  to  the  top  of  the  social 
ladder,  by  offering  the  prospect  of  gradual  advancement. 
It  gives  individual  initiative  the  greatest  possible  scope  by 
permitting  the  concentration  of  enormous  capital  in  the 
hands  of  those  who  are  capable  of  using  it  to  the  best  advan- 


EFFECTS    OF   ECONOMIC    INEQUALITY  443 

tage.  It  gives  rise  to  an  abundant  variety  of  human  activi- 
ties, and  the  widest  conceivable  range  of  wants  and  desires. 
Men  desire  wealth  ardently,  not  so  much  because  of  the 
pleasures  as  of  the  power  which  it  procures.  And  power 
involves  inequality. 

But  in  order  that  the  inequality  of  wealth  shall  satisfy  the 
above  conditions,  it  must  as  far  as  possible  be  proportion- 
ate to  the  values  created  by  its  owners,  or  to  the  services 
rendered  to  society.  The  ultimate  aim  of  all  social  reform 
is  to  achieve  a  closer  relation,  a  parallelism,  between  riches 
and  productivity  or  social  service. 

The  logical  consequence  of  this  condition  seems  to  be  that 
wealth  must  not  be  inheritable,  for  if  it  is,  it  is  not  the 
recompense  of  personal  effort.  But  it  should  be  noted  that 
although  the  inheritability  of  wealth  does  not  stimulate 
the  labor  of  the  children,  it  does  stimulate  that  of  the 
parents.  At  all  events,  there  is  nothing  sui  generis  about 
the  inheritability  of  economic  inequality,  inasmuch  as  natural 
inequalities,  —  health  or  disease,  strength  or  weakness,  beauty 
or  homeliness,  often  talent  or  stupidity,  and,  in  all  cases,  the 
family  name,  which  is  frequently  a  help  or  a  hindrance  in 
itself,  —  are  also  transmitted  by  heredity.  We  shall  have 
occasion  to  refer  again  to  this  point. 

Yet  we  are  perfectly  willing  to  admit  that  perpetual  ine- 
qualities are  extremely  unfortunate,  because  they  create  class 
distinctions.  They  discourage  those  who  are  placed  low  in 
the  social  ladder,  by  depriving  them  of  all  opportunity  to 
rise  ;  and  they  conduce  to  inactivity  among  the  wealthy  be- 
cause wealth  induces  a  feeling  of  permanent  security  in  those 
that  possess  it.  Great  permanent  differences  of  wealth  break 
the  ties  of  social  solidarity,  and  create  a  chasm  between 
Lazarus  and  Dives  across  which  no  bridge  can  be  built. 
Those  that  are  poor  cease  to  work,  because  it  seems  useless ; 
those  that  are  too  rich  abandon  all  productive  effort  because 
they  no  longer  need  to  work.  These  economic  extremes  en- 
gender two  evils  which  have  afflicted  society  so  long,  —  indo- 


4i4  PRINCIPLES    OF    POLITICAL   ECONOMY 

lence  and  pauperism,  —  both  of  which  lead  to  unproductive 
consumption.  By  creating,  at  the  top  and  at  the  bottom  of 
the  social  ladder,  two  classes  of  social  parasites,  extreme 
inequality  works  precisely  contrary  to  natural  selection,  the 
beneficent  effects  of  which  are  so  often  glorified  by  optimistic 
economists. 

But  differences  of  wealth  are  unlikely  to  have  this  endur- 
ing character  except  in  communities  where  they  are  defended 
and  aggravated  by  the  laws,  —  as,  for  example,  in  England. 
In  democratic  communities,  inherited  fortunes  do  not  usually 
remain  long  in  the  possession  of  incapable  persons. 

VII.   The  Right  to  be  Idle 

In  all  societies,  savage  as  well  as  civilized,  —  and  especially 
in  the  former,  all  statements  to  the  contrary  notwithstand- 
ing, —  there  are  persons,  usually  a  minority,  who  do  noth- 
ing. But  although  they  do  not  work,  this  does  not  hinder 
them  from  living,  or  even  from  living  very  comfortably. 
Ordinarily,  it  is  among  pe'ople  of  this  class  that  we  find  the 
largest  incomes.  Not  only  are  these  incomes  often  larger 
than  those  due  to  labor,  but  they  possess  the  great  advantage 
of  being  more  regular.  In  all  kinds  of  weather,  and  no 
matter  whether  the  recipient  is  in  good  health  or  not,  no 
matter  whether  he  is  young  or  old,  no  matter  whether  he 
stays  at  home  or  spends  his  time  and  money  travelling  round 
the  world,  his  income  always  reaches  him.  When  a  man 
possesses  this  advantage  he  is  said  to  "  live  on  an  independ- 
ent income,"  that  is  to  say,  his  income  is  assured  and  he 
need  not  pay  any  attention  to  the  problem  of  earning  a 
livelihood.  The  possession  of  an  independent  income  assures 
two  privileges  which  are  superior  to  all  the  enjoyments  that 
wealth  of  other  kinds  may  procure ;  namely,  security  and  in- 
dependence. Certainly  these  are  valuable  possessions,  and 
we  may  well  ask  the  happy  mortals  who  enjoy  them  what 
good  fortune  has  made  their  lot  so  pleasant,  Deus  vobis  haec 
otia  fecit  ? 


INDEPENDENT   INCOMES  445 

To  give  a  complete  answer  to  this  question  would  require 
an  investigation  of  the  origin  of  the  various  classes  of  income, 
especially  of  interest  and  land-rent ;  and  such  an  investiga- 
tion, which  we  shall  attempt  further  on,  would  establish  the 
principle  that  the  man  who  receives  an  independent  income 
lives  on  the  product  of  past  labor. 

When  this  income  may  be  regarded  as  the  result  of  his  own 
past  labor,  as,  for  example,  the  pension  received  by  a  retired 
public  official,  or  the  income  received  by  any  one  who  has 
"  put  aside  something  "  for  his  old  age,  there  can  be  no  reason- 
able objection  to  it.  We  cannot  insist  that  a  man  must  work 
throughout  his  entire  life.  If  he  has  worked  faithfully  dur- 
ing the  productive  period  of  life,  it  is  just  and  proper  that  he 
be  permitted  to  take  a  rest  during  the  unproductive  period. 
Even  socialists,  such  as  Bellamy  in  his  "  Looking  Backward," 
declare  that  under  the  collectivist  regime  a  man  of  forty-five 
years  should  be  relieved  of  all  work  for  society  and  thereafter 
be  permitted  to  do  what  he  pleases  and  live  upon  an  income 
provided  by  society. 

But  when  this  past  labor  was  the  labor  of  others,  i.e.  of  some 
immediate  or  remote  ancestor,  or  even  of  some  non-consan- 
guineal  benefactor,  who  created  a  fortune  at  some  time  in  the 
past  and  left  it  to  the  subsequent  possessor  with  the  right  to 
consume  it  in  idleness,  —  the  question  is  a  more  embarrass- 
ing one  and  implies  the  solution  of  the  difficult  problem  of 
inheritance. 

From  the  purely  economic  point  of  view  this  problem  doubt- 
less is  easy  to  solve.  We  have  already  compared  money  to 
"orders"  for  consumption  or  claims  to  goods,  giving  the 
owner  the  right  to  obtain  a  certain  quantity  of  wealth,  indi- 
cated by  the  value  of  the  money.  Suppose  that  a  man  has 
earned  by  his  labor  a  large  number  of  these  "  orders."  If  he 
does  not  care  to  use  them  himself  (now  or  at  some  future 
time),  he  can  transfer  them  to  some  one  who  will  use  them 
in  his  stead.  Obviously,  he  has  a  perfect  right  to  do  this. 
(See  page  220.) 


446  PRINCIPLES   OF   POLITICAL   ECONOMY 

But  from  the  moral  point  of  view  the  problem  is  a  more 
difficult  one.  It  may  well  be  held  that  the  idle  property-owner 
who  lives  on  an  income  due  to  the  labor  of  others  is  not 
"  squared  "  with  society  by  simply  paying  the  price  for  the 
goods  that  he  has  consumed.  It  may  be  maintained  that  it 
is  not  sufficient  for  him  to  exchange  only  money,  —  that  is 
to  say,  the  product  of  the  past  labor  of  others, —  but  that 
he  should  also  make  some  return  in  present  services  of  his 
own,  representing  the  equivalent  of  the  income  which  he  re- 
ceives. The  goods  that  he  consumes  from  day  to  day  are 
the  products  of  present  labor,  not  of  labor  long  past,  and 
justice  would  seem  to  demand  that  in  exchange  for  what  his 
fellow-creatures  are  doing  for  him  he  should  be  required  to 
do  something  for  them.  A  classical  economist  has  said  that 
"  the  man  who  lives  upon  an  independent  income  is  an  em- 
ployee who  has  been  paid  in  advance."  If  he  has  been  paid 
in  advance,  this  implies  that  he  still  owes  a  certain  amount  of 
labor.  He  should,  as  the  term  goes,  "  make  himself  useful." 
If  he  is  of  no  service,  economists  will  in  vain  show  that  he 
furnishes  a  full  money-equivalent  for  all  that  he  obtains  ;  his 
lot  is  nevertheless  that  of  a  social  parasite. 

It  cannot  be  denied,  however,  from  the  historical  point  of 
view,  that  the  so-called  idle  rich  have  in  the  past  performed 
a  genuine  social  function,  a  social  function  of  the  very  first 
importance ;  namely,  the  creation  of  the  arts,  the  sciences, 
literature,  politics,  refinement,  and  culture,  —  everything, 
in  a  word,  that  constitutes  civilization.  We  owe  all  these 
things  to  the  idle  rich  of  Greece,  Rome,  Judea,  and  of  all 
those  antique  societies  in  which  it  must  be  admitted  that 
idleness  possessed  the  particularly  odious  characteristic  of 
being  due  solely  to  force,  robbery,  and  slavery. 

But  will  this  always  be  the  case  ?  In  order  to  take 
proper  care  of  the  great  interests  of  society,  to  unravel  the 
fine  threads  of  diplomacy,  to  hold  the  reins  of  government, 
or  to  carry  worthily  the  sceptre  of  taste  in  the  kingdom  of 
arts  and  letters,  shall  we  always  have  need  of  delicate  hands 


THE  IMPORTANCE   OF   LEISURE  447 

that  have  never  been  hardened  by  labor,  and  of  minds  that 
have  never  felt  the  burden  of  a  binding  duty  or  the  neces- 
sity to  earn  a  living  ? 

Socialists  assure  us  of  the  contrary.  They  hold  that  all 
the  necessary  and  desirable  social  functions  can  and  will  be 
performed  and  rewarded  even  in  modern  democratic  societies. 
They  insist  that  all  public  servants,  including  all  those  persons 
that  perform  useful  social  services  of  any  kind  whatsoever, 
should  be  paid  for  these  services.  Admitting,  furthermore, 
that  certain  intellectual  or  philanthropic  work  should  re- 
main gratuitous,  they  hold  that  the  socialistic  organization 
of  society  will  provide  everybody  with  sufficient  leisure, 
when  his  own  work  is  done,  to  look  after  these  matters  in 
perfect  freedom. 

There  is  no  doubt  that  we  should  endeavor  to  assure  to  all 
persons  a  certain  amount  of  leisure,  not  in  order  to  enable 
them  to  remain  idle,  but  to  make  them  free  to  participate  in 
all  those  liberal  activities  (using  the  term  "  liberal "  in  its 
etymological  meaning)  which  are  both  a  duty  and  an  honor. 
This  arrangement  would  remove  the  objections  to  the  division 
of  labor.  (See  page  181.)  It  is  obvious  that  when  a  suffi- 
cient amount  of  leisure  is  assured  to  all,  there  will  be  no  ex- 
cuse for  the  existence  of  a  special  class  of  idle  rich.  Hence 
the  reduction  of  the  hours  of  labor  is,  from  this  point  of 
view,  one  of  the  most  unquestionable  achievements  of  the 
nineteenth  century.  But  there  still  remains  much  to  be 
accomplished  in  this  direction. 

VIII.  The  Right  to  Relief 

The  inequality  of  riches  not  only  creates  a  class  of  idle 
property-owners,  who  live  on  their  incomes,  but  it  also  gives 
rise  in  all  countries  to  a  more  or  less  numerous  class  of  idle 
dependents  who  cannot  or  will  not  live  by  their  own  labor, 
and  who  consequently  live  on  alms,  i.e.  on  private  or  public 
charity. 


448  PRINCIPLES   OF   POLITICAL   ECONOMY 

There  are  three  possible  reasons  why  people  do  not  work :  — 

(1)  They  may  not  have  the  strength  to  work.      This  is 
the  case  with  young  children,  the  aged,  and  all  those  who 
suffer  from  chronic  diseases  or  permanent  infirmities. 

(2)  They  may  not  be  willing  to  work.     All  labor  involves 
effort.     Rather  than  make  this  effort,  and,  above  all,  rather 
than  be  subject  to  the  discipline  which  every  kind  of  labor 
involves,  many  prefer  to  risk  suffering  want.    (See  page  82.) 

(8)  They  may  be  unable  to  find  the  means  or  the  oppor- 
tunity to  work.  It  is  not  enough  for  a  man  to  be  willing 
and  physically  able  to  work.  He  must  have  tools  and  ma- 
terial at  his  disposal ;  and  as  these  can  usually  be  obtained 
only  from  so-called  employers,  the  laborer  must  find  some 
one  to  "  employ  "  him. 

What  should  society  do  with  regard  to  these  three  classes 
of  dependants?  It  cannot  escape  the  problem  of  making 
some  provision  for  them. 

The  first  class  should  be  taken  care  of,  because  society  as 
a  whole  should  feel  a  certain  degree  of  responsibility  for  all  its 
members.  Under  normal  conditions  the  family  should  of 
course  support  those  of  its  members  who  are  unable  to  pro- 
vide for  themselves.  But  under  the  present  social  system  the 
members  of  the  family  are  frequently  scattered  far  and  wide. 
Sometimes,  even  (as  in  the  case  of  illegitimate  children), 
there  is  no  family.  In  other  cases  it  is  advisable  to  take 
children  away  from  parents  who  pervert  them  or  who  simply 
regard  them  as  a  source  of  profit.  How  often,  on  the  other 
hand,  it  would  be  well  to  take  the  old  people  away  from 
their  own  sons  and  daughters  who  maltreat  them  !  If  civil- 
ized society  must  let  its  young  or  its  aged  members  die  of 
hunger,  would  they  not  be  better  off  in  that  savage  state  of 
society  in  which  the  old  and  the  indigent  were  treated  with 
veneration  and  love,  or  mercifully  strangled  in  order  that 
they  should  suffer  no  longer  ? 

Society  must  care  also  for  the  second  class,  because  it  consti- 
tutes a  public  danger.  The  army  of  crime  is  recruited  from 


SOCIAL   RESPONSIBILITY  449 

this  population  of  vagabonds  and  beggars.  When  they 
commit  an  offence,  society  is  obliged  to  house  and  feed  them 
in  jail ;  and  as  the  support  of  a  prisoner  is  a  matter  of  con- 
siderable cost,  it  is  more  prudent  and  more  economical  to 
reduce  crime  than  simply  to  punish  it.1 

Society  should  also  give  attention  to  the  third  class,  be- 
cause it  is  to  some  extent  responsible  for  their  misfortune. 
The  economic  constitution  of  society  involves  an  unnatural 
separation  of  the  workman  from  the  instrument  of  labor, 
and  places  him  under  the  necessity  of  working  for  others 
in  order  to  gain  a  livelihood.  The  very  law  of  progress 
—  as  illustrated  by  large-scale  production,  mechanical  in- 
ventions, international  commerce,  and  competition  —  causes 
unemployment  and  crises.  (See  pages  113  and  142.)  It  is 
therefore  just  and  proper  that  society,  which  as  a  whole 
profits  by  each  step  of  economic  progress  and  which  in  the 
battle  of  life  reaps  all  the  spoils  of  victory,  should  also  bear 
the  unfortunate  consequences  of  progress  and  come  to  the 
help  of  the  injured  and  the  vanquished. 

The  claim  which  these  various  classes  have  upon  society 
may  be  called  the  right  to  relief.  Socialists,  however,  are  not 
fond  of  this  expression.  They  regard  it  as  humiliating,  and 
prefer  to  employ  the  term  right  to  existence,  or,  when  speaking 

1  In  a  paper  on  the  "  Cost  of  Crime,"  prepared  by  Mr.  Eugene  Smith  for 
the  National  Prison  Association,  the  statement  is  made  that  the  cost  of  crime 
in  the  city  of  New  York,  in  city  and  county  taxes,  is  over  $20,000,000, 
out  of  a  total  public  expenditure  of  $90,000,000.  Thus  the  cost  of  crime  in 
New  York  averages  $6  for  each  individual  of  the  population.  In  most 
cities  it  is  probably  less  than  this,  but  in  many  of  them  it  exceeds  $3  per 
capita.  Mr.  Smith  reaches  the  conclusion  that  for  the  whole  United  States 
the  annual  cost  of  crime  is  $200,000,000.  This  exceeds  in  amount  every 
other  object  of  public  expenditure  except  only  that  of  our  military  es- 
tablishment in  time  of  war.  The  cost  of  public  education  throughout  the 
whole  United  States,  according  to  the  census  of  1890,  amounted  to  $139,000,000. 
This  is  the  item  that  most  nearly  approaches  the  cost  of  crime.  It  should  be 
remembered,  moreover,  that  this  estimate  of  $200,000,000  represents  only 
the  outlay  for  the  punishment  of  crime,  and  by  no  means  includes  the  dam- 
age due  directly  or  indirectly  to  criminal  conduct. 


450  PRINCIPLES    OF    POLITICAL   ECONOMY 

of  able-bodied  dependents,  right  to  work.  These  are  osten- 
tatious words,  but  at  the  bottom  they  mean  nothing  more 
than  a  claim  upon  society,  i.e.  upon  one's  fellow-citizens,  to 
provide  the  means  of  existence.  To  ask  our  fellow-creatures 
for  help  because  we  are  unable  to  take  care  of  ourselves, 
always  constitutes,  no  matter  what  name  we  care  to  give  it,  a 
request  for  relief.  But  there  is  nothing  humiliating  about 
such  a  request ;  for  there  is  not  one  of  us  but  has  constant 
need  of  the  help  of  others. 

Only,  when  we  use  the  expression  "right  to  relief,"  we 
must  admit  its  full  purport,  and  recognize  that  it  implies  an 
obligation  on  the  part  of  society,  —  not  only  a  natural,  but 
a  legal  obligation.  Many  economists  regard  relief  as  a  social 
duty,  but  not  as  a  right  possessed  by  the  dependent.  This, 
however,  is  legal  sophistry.  Whenever  a  person  happens 
to  be  placed  under  those  conditions  which  call  for  interven- 
tion and  which  are  carefully  stated  by  law,  society  should 
not  be  permitted  to  escape  the  duty  to  help  him.  The 
expenses  necessary  to  accomplish  this  object  should  form 
a  part  of  the  regular  expenditure  of  the  nation  or  the  muni- 
cipality. When  this  is  the  case,  we  speak  of  legal  relief  as 
opposed  to  optional  relief. 

It  is  true  that  relief,  especially  when  regulated  by  law  as 
part  of  the  public  administration,  and  still  more  especially 
when  it  constitutes  a  "  right "  belonging  to  the  needy,  in- 
volves grave  dangers.  These  dangers  have  been  brought 
out  by  all  the  classical  economists,  but  by  none  of  them  with 
more  vigor  than  by  Malthus.  The  objections  which  they 
urge  may  be  summed  up  in  the  familiar  formula  :  The  num- 
ber of  dependents  tends  to  increase  in  direct  ratio  to  the  aid  they 
count  upon  receiving.  The  reasons  given  for  this  formula  are 
the  following  :  — 

(1)  The  right  to  relief  puts  a  premium  on  improvidence. 
Many  persons  who  might  have  succeeded  in  surmounting 
the  difficulties  of  life,  had  they  depended  entirely  upon  them- 
selves, neglect  to  provide  for  their  own  future  or  for  that  of 


ARGUMENTS   AGAINST   RELIEF  451 

their  children  when  they  learn  to  depend  upon  public  succor 
for  themselves  and  their  offspring.  The  farm-hands  say  in 

England  :  — 

"  Hang  sorrow  and  cast  away  care  ! 
The  parish  is  sure  to- find  us  I  " 

(2)  The  right  to  relief  causes  a  rapid  increase   of  popu-  -f- 
lotion  among  the  dependent  classes.     Paupers   need  have  no 
anxiety  with  regard  to  the  support  of  their  offspring,  since 
they  are  not  required  to  rear  them.     A  large  family,  on  the 
contrary,  means  additional  gain,  inasmuch  as  resources  are 
usually  distributed  according  to  the  number  of  children  be- 
longing to  the  family.     Hence  the  government  is  obliged  to 
pay  a  bounty,  as  it  were,  to  the  ntost  prolific  dependents. 
Thus  there  is  formed,  in  the  lowest  depths  of  society,  a  large 
class  of  paupers  whose  names  are  all  inscribed  upon  the  rec- 
ords of  public  charity,  and  who  become  the  permanent  bene- 
ficiaries of  the  public.      Generation  after   generation  they 
transmit  their  claims  on  society  as  well  as  their  vices,  and 
continue  a  despised  race,  too  degraded  to  be  dissatisfied  with 
their  lot  or  to  attempt  to  rise  above  it. 

(3)  The  right  to  relief  burdens  the  productive  classes  of  *• 
society  for  the  sake  of  the  unproductive  classes,  and  interferes 
with   the  law  of  natural  selection  which  tends  toward  im- 
provement  by  enabling   the  superior  to   triumph  over  the 
inferior.      It  is  obvious  that  the  pauper  classes  cannot  be 
regarded  as  the  healthiest  or  the  most  vigorous  part  of  the 
social  organism.      Society  provides  for  their  relief  by  means 

of  taxes,  that  is  to  say,  by  deducting  a  share  of  the  prod- 
uct of  the  labor  of  those  who  are  able  to  produce.  As  the 
class  of  dependents  tends  to  increase  most  rapidly,  the  tribute 
which  they  exact  from  the  laborious  classes  constantly  grows 
more  burdensome,  and  may  ultimately  drag  the  laborious 
classes  likewise  into  the  depths  of  poverty. 

Although  the  above  arguments  show  that  we  cannot  be  too 
careful  in  the  administration  of  public  relief,  they  must  not 
lead  us  to  ignore  the  bond  of  social  solidarity  which  unites 


452  PRINCIPLES    OF   POLITICAL   ECONOMY 

all  mankind.  No  one,  in  fact,  denies  all  responsibility  of 
society  for  its  members  ;  the  real  problem  is  one  of  degree. 

We  must  admit  that  the  prospect  of  regular  help  from 
the  public  treasury  may  tend  to  curtail  productive  activity 
and  saving.  But  cannot  the  same  be  said  with  regard  to  the 
wealthy  classes  which  we  have  considered  in  the  preceding 
pages  ?  Does  not  the  prospect  of  inheriting  a  large  fortune, 
or  the  possession  of  a  large  amount  of  interest-bearing 
securities  produce  exactly  the  same  unfortunate  result  as  the 
certainty  of  public  assistance  ? 

We  must  also  admit  that  the  birth-rate  is  higher  among  de- 
pendents than  among  the  classes  that  .support  themselves  ; 
but  if  the  children  of  the  former  can  be  made  useful  citizens, 
they  should  be  regarded  not  as  a  danger  but  as  a  gain,  espe- 
cially in  view  of  the  fact  that  among  the  rich  the  birth-rate 
is  rapidly  decreasing. 

It  is  true,  finally,  that  the  maintenance  of  all  diseased,  infirm, 
defective,  or  lazy  persons  may  be  prejudicial  to  the  economic 
evolution  of  society.  But  moral  advancement  is  quite  as 
important  as  economic  progress,  and  moral  advancement 
would  be  sacrificed  if  society  should  pitilessly  exterminate 
all'  these  persons. 

We  must,  furthermore,  carefully  bear  in  mind  that  a  well- 
organized  system  of  public  relief  does  not  increase  the  number 
of  dependents.  At  the  present  time  public  charity  and  relief 
is  more  effectively  and  scientifically  organized  than  ever 
before ;  never  have  its  resources  been  greater  ;  never  has  its 
scope  been  wider.  Yet  the  proportion  of  dependants  has  not 
increased.  On  the  contrary,  it  has  decreased  in  all  countries, 
especially  in  England,  despite  the  fact  that  England  is  re- 
garded as  the  very  type  of  a  nation  in  which  public  relief  is 
established  by  law,  and  despite  the  fact  that  England  served 
as  the  special  theme  of  Malthus'  most  pessimistic  predictions.1 

1  The  number  of  those  that  receive  relief  in  England,  after  having  in- 
creased at  a  startling  rate  and  reaching,  in  1849,  63  per  thousand  (one  de- 
pendent for  every  sixteen  persons  in  the  country),  has  now  fallen  to  23  per 
thousand  (one  for  every  forty-three  persons). 


SOCIAL  INSURANCE  453 

To-day  the  remark  is  often  made,  especially  by  socialists, 
that  the  day  of  public  and  private  relief  and  charity  is  past, 
and  that  their  place  will  be  taken  by  insurance,  —  insurance 
founded  either  upon  mutual  association  or  upon  government 
cooperation.  Certainly  this  would  be  desirable.  An  organ- 
ized system  of  insurance  against  sickness,  against  loss  of 
employment,  against  the  untimely  death  of  the  head  of  the 
family,  and  against  all  those  misfortunes  to  which  working- 
men  are  exposed,  would  certainly  result  in  the  suppression 
of  almost  all  the  economic  causes  of  pauperism.  But  there 
would  still  remain  the  moral  causes  —  such  as  drunkenness, 
laziness,  and  prodigality.  Will  better  education  ever  remove 
these  causes  ?  We  can  at  the  most  only  hope  that  it  will. 

The  unfortunate  effects  of  public,  legal  relief  are  reduced  to  a  minimum 
when  it  is  organized  on  the  following  principles :  — 

(1)  It  should  be  administered  by  the  local  authorities.     The  municipality 
is  much  better  able  to  distinguish  the  deserving  from  the  impostors,  and  is 
usually  more  economical  with  its  funds. 

(2)  It  should  be  granted  by  special  institutions,  which  should,  if  pos- 
sible, be  divided  into  three  classes  corresponding  to  the  three  classes  of  social 
inefficients  mentioned  above.      Legal  relief    cannot    attempt  to  go  to  the 
homes  of  the  needy  to  distribute  its  funds  or  provisions.    As  far  as  help  at 
the  homes  of  the  needy  is  concerned,  legal  relief  can  only  supplement  private 
charity  and  make  it  more  systematic.     The  celebrated  Elberfeld  system  owes 
its  superiority  to  the  successful  alliance  of  public  and  private  charity. 

(3)  It  implies,  finally,  the  strict  prohibition  of  mendicancy.     For  if  impe- 
cunious persons  can  procure  help  without  working,  simply  by  begging,  no 
rational  system  of  relief  can  hope  to  succeed. 


CHAPTER   II  — THE    SOCIALISTIC    SYSTEMS 

As  the  present  method  of  distribution  seems  unjust  from 
many  points  of  view,  men  have  long  been  in  quest  of  some 
better,  more  equitable  method.  This  quest  has  given  rise  to 
the  numerous  systems  of  socialism. 

It  must  be  noted  that  socialists  do  not  object  to  the  pres- 
ent system  solely  from  the  viewpoint  of  distribution  and  of 
distributive  justice.  They  would  transform  the  entire  sys- 
tem of  production  and  exchange.  Fourier,  for  instance, 
cares  less  for  the  means  of  effecting  a  better  distribution  of 
wealth  than  he  does  for  the  best  way  to  increase  the  supply 
of  wealth.  Karl  Marx  regards  all  systems  of  distribution, 
past  or  present,  simply  as  the  necessary  outcome  of  prevailing 
methods  of  production. 

Yet  a  brief  investigation  of  the  various  systems  of  socialism 
seems  most  properly  to  belong  to  this  book  on  Distribution 
because  all  of  these  systems  are,  fundamentally,  phases  of  the 
perpetual  war  of  the  poor  against  the  rich. 

In  the  first  part  of  this  book  we  outlined  the  general  prin- 
ciples which  are  common  to  all  schools  of  socialistic  thought 
(see  page  28),  and  we  shall  now  point  out  the  distinctive 
characteristics  of  the  principal  systems  of  socialism,  especially 
those  which  advocate  one  of  the  following  four  principles  of 
"  equitable  "  distribution:  — 

(1)  Every  one  should  have  an  equal  share  of  the  social 
product. 

(2)  Each  person  should  receive  according  to  his  wants. 

(3)  Each  person  should  receive  according  to  his  merits. 

(4)  Each  person  should  receive  according  to  his  work. 
Let  us  examine  each  of  these  in  turn. 

454 


THE   EQUALIZATION    OF    WEALTH  455 


I.  Equal  Sharing 

This  childish  system  of  distribution  seems  to  have  pre- 
vailed in  the  very  remote  past,  inasmuch  as  all  the  antique 
lawgivers  whose  names  have  been  handed  down  to  us  by 
history  or  by  legend  —  Minos,  Lycurgus,  Romulus  —  appear 
to  have  divided  the  land  among  the  people,  giving  an  equal 
share  to  each  person,  or  at  least  to  each  family.  As  this 
original  equality  was  necessarily  destroyed  in  the  course  of  a 
few  generations,  it  had  to  be  reestablished  from  time  to  time 
by  new  divisions.  In  primitive  communities  comprising 
only  a  few  members  and  having  but  one  kind  of  wealth  — 
land  —  such  a  system  as  this  was  possible.  But  in  modern 
societies  like  our  own  it  would  be  absurd.  To-day  there 
are,  as  a  matter  of  fact,  no  advocates  of  equal  sharing  — 
not  even  among  revolutionary  socialists. 

There  is  nevertheless  still  a  trace  of  this  naive  idea  at  the 
basis  of  socialistic  systems.  They  take  it  for  granted  that  in 
all  civilized  societies  there  is  more  than  enough  wealth  to 
satisfy  the  wants  of  all,  and  that  there  are  destitutes  among 
us  simply  because  the  rich  have  despoiled  the  poor.  All  we 
need  to  do,  therefore,  is  to  take  back  that  part  of  the  social 
product  which  the  rich  have  unjustly  appropriated.  Revolu- 
tionary socialists  would  do  this  simply  by  expropriation; 
moderate  socialists  would  accomplish  it  by  means  of  progres- 
sive taxation.  This,  at  all  events,  is  certainly  the  popular 
sentiment  among  socialists. 

In  all  countries,  however,  the  rich  constitute  a  small  mi- 
nority. Society  has  often  been  compared,  with  regard  to  the 
relative  numbers  of  rich  and  poor,  to  a  pyramid,  the  apex  of 
which  represents  the  wealthiest  persons,  and  the  base  the 
poorest  classes.1  Even  if  the  incomes  of  the  rich  were  divided 

1  Vilfredo  Pareto,  in  his  "  Cours  d'Economie  politique,"  has  given  a  vast 
amount  of  statistical  data  regarding  the  past  and  present  distribution  of  wealth, 
and  prepared  what  he  calls  "  the  curve  of  incomes."  This  curve  confirms 
the  illustration  of  the  pyramid,  but  rectifies  it  to  some  extent  by  means  of 


456  PRINCIPLES   OF  POLITICAL   ECONOMY 

among  all  the  people,  no  one  would  thereby  become  opulent. 
If  we  destroyed  the  highest  mountain  range  in  the  country, 
and  spread  it  out  over  the  whole  continent,  the  earth's  level 
would  not  be  raised  more  than  a  few  inches. 

It  is  not  sufficiently  borne  in  mind  that  the  existence  of  so 
many  persons  possessing  but  a  small  amount  of  the  world's 
goods  does  not  necessarily  prove  that  wealth  is  poorly  dis- 
tributed. It  proves  rather  that  there  is  not  enough  wealth 
for  distribution.  What  makes  this  problem  difficult  is  not 
so  much  the  unequal  distribution  of  wealth  —  this  difficulty 
might  easily  be  remedied  —  but  the  insufficiency  of  wealth.1 

We  have  already  defined  wealth  (see  pages  48  and  49)  as 
including  all  that  mankind  believes  to  be  useful  and  can  util- 
ize, reserving  the  term  "  services  "  to  designate  all  the  acts 
of  man  that  are  capable  of  directly  furnishing  enjoyment. 
We  have,  furthermore  (page  184  ff.),  pointed  out  that 
wealth  is  usually  estimated  according  to  its  exchange  value, 
that  is  to  say,  according  to  what  it  will  bring  on  the  market. 
Not  all  wealth  is  actually  offered  for  sale;  therefore  we  can 
only  approximate  its  actual  value.  The  ability  to  perform  val- 
uable services,  moreover,  whether  this  ability  be  mere  physi- 
cal strength  or  the  special  skill  of  the  surgeon  or  the  trained 
knowledge  of  the  lawyer,  is  quite  as  important  a  source  of 
income  as  corporeal  wealth  ;  in  an  inventory  of  the  nation's 
valuable  possessions  all  the  personal  services  that  it  has  at 
its  disposal  should  be  counted.  But  it  is  impossible  to  com- 
pute the  various  personal  services  that  form  part  of  the 

mathematical  calculations.  If  Pareto's  results  were  expressed  in  the  form 
of  a  pyramid,  its  sides  would  be  concave,  and  it  would  terminate  in  a 
sharp,  tapering  point.  Concerning  the  actual  present  distribution  of  wealth 
and  incomes,  see  Section  VI  of  the  preceding  chapter. 

1  Then  why,  it  may  be  asked,  do  we  always  hear  complaints  of  overpro- 
duction ?  The  answer  is  simple.  Overproduction  in  any  branch  of  industry 
does  not  necessarily  imply  that  more  has  been  produced  than  is  needed,  but 
more  than  can  be  purchased  by  those  who  buy  the  products  of  this  branch  of 
industry.  A  proof  of  this  consists  in  the  fact  that  by  lowering  prices  the 
surplus  of  goods  can  always  be  disposed  of.  Low  prices  may,  to  be  sure, 
ruin  the  producers,  but  that  is  not  the  question  which  concerns  us  here. 


THE   TOTAL   WEALTH  457 

social  wealth  at  any  moment.  Hence  the  common  concep- 
tion of  social  wealth  is  limited  to  the  material  possessions  of 
the  community.1 

Bearing  this  limitation  in  mind,  we  may  estimate  the  total 
wealth  of  the  United  States  and  ascertain  what  would  be  the 
result  of  an  equal  distribution  of  wealth  in  this  country. 

The  census  valuation  of  real  and  personal  property  in  the 
United  States  (excluding  Alaska)  in  1890  gave  a  total  of  over 
$65,000,000,000,  of  which  the  most  important  items  were  as 
follows:  $ 35,000,000,000  in  real  estate  with  improvements 
thereon;  §2,700,000,000  in  live  stock  on  farms,  farm  imple- 
ments, and  machinery;  11,300,000,000  in  mines  and  quarries, 
including  product  on  hand;  11,100,000,000  in  gold  and  silver 
coin  and  bullion;  $3,000,000,000  in  machinery  of  mills,  and 
product  on  hand  (raw  and  manufactured);  $9,700,000,000 
in  railroads  and  equipment,  including  street  railroads  ;  $700,- 
000,000  in  telegraphs,  telephones,  shipping,  and  canals.2 

1  Some  economists  have  proposed  to  regard  the  productive  population  as 
part  of  a  nation's  wealth.    If  this  be  correct,  every  additional  able-bodied  im- 
migrant increases  our  national  wealth  ;  his  value  may  be  "  capitalized,"  on 
the  basis  of  his  annual  earnings,  at  the  current  rate  of  interest.    Dr.  Engel, 
an  eminent  German  statistician,  estimates  the  value  of  an  able-bodied  immi- 
grant to  a  new  country  at  $1000. 

2  The  figures  for  1890  were  the  latest  complete  official  figures  obtainable. 
The  census  for  1900,  however,  throws  some  light  upon  the  probable  increase 
of  the  total  national  wealth  since  1890,  inasmuch  as  the  valuation  of  certain 
kinds  of  property  in  1899  is  given  by  the  census  authorities.     Thus  farm 
land  with  the  improvements  thereon,  including  buildings,  amounted  in  1899 
to  $16,614,647,491  ;  live  stock  on  farms  amounted  to  $3,075,477,703 ;  farm 
implements  and  machinery  were  valued  at  $749,775,970 ;  the  value  of  farm 
products  was  $3,742,129,357  ;   the  capital  of  manufacturing  establishments 
amounted  to  $9,831,486,500,  as  compared  with  $6,525,050,759  in  1890.     It 
is  probable  that  this  increase  of  44  per  cent  in  the  value  of  manufacturing 
establishments  was  the  greatest  increase  for  the  decade. 

Taking  these  figures  into  careful  consideration,  and  after  due  reference  to 
estimates  made  by  several  careful  investigators,  it  is  probable  that  the  total 
wealth  of  the  nation  in  1900  was  about  $93,885,000,000  — an  increase  of 
about  40  per  cent  above  the  figures  for  1890. 

Gide  estimates  the  wealth  of  France  at  about  $40,000,000,000.  Divide 
this  amount  by  the  population,  39,000,000,  and  the  quotient  is  about  $1025. 


458  PRINCIPLES   OF   POLITICAL   ECONOMY 

Dividing  the  total  valuation  by  the  population  in  1890,  we 
get  a  quotient  of  11030  as  the  per  capita  wealth.  Taking 
the  average  size  of  the  family  at  that  time  as  a  basis,  we  find 
that  each  family  would  have  15073  as  its  share,  if  the  wealth 
of  the  nation  were  equally  divided;  and  of  this  amount 
$3086  would  be  in  real  estate  and  $86  in  gold  and  silver. 

The  national  income  for  1890  has  been  carefully  estimated1 
at  $10,800,000,000,  or  about  $431  for  each  person  engaged 
in  remunerative  business,  including  men,  women,  and  chil- 
dren. This  would  mean  an  average  income  of  $769  per 
family.2 

It  may  be  maintained  that  this  would  be  better  than 
the  present  state  of  affairs  for  many  of  us.3  Who  would 

If  all  the  wealth  of  France  were  divided  equally,  and  each  family  is  supposed 
to  consist  of  four  members,  the  property  of  each  family  would  amount  to 
$4100,  of  which  about  $1400  would  be  in  land,  $1000  in  buildings,  $1300 
in  securities  and  credit  claims,  $260  in  furniture,  clothing,  and  objects  of 
consumption,  and  about  $140  in  money. 

According  to  R.  E.  May  ("Die  Wirtschaft  in  Vergangenheit,  Gegen- 
wart  und  Zukunft,"  Berlin,  1901)  the  per  capita  wealth  of  the  other  prin- 
cipal countries  in  1895  was  as  follows  :  — 

United  Kingdom,  $1548  ;  Germany,  $799 ;  Russia,  $313 ;  Austria,  $533 ; 
Italy,  $518  ;  Spain,  $692  ;  Australia,  $1312. 

The  same  authority  finds  the  per  capita  income  in  1895  for  these  countries 
to  be  as  follows  :  — 

United  Kingdom,  $184  ;  Germany,  $126  ;  Russia,  $49 ;  Austria,  $85  ; 
Italy,  $71  ;  Spain,  $79 ;  Australia,  $262. 

1  By  Dr.  C.  B.  Spahr,  "  The  Present  Distribution  of  Wealth  in  the  United 
States"  (1896). 

2  The  total  national  income  for  1900  was  probably  over  $15,000,000,000. 

3  M.  Vilfredo  Pareto  has  carefully  examined  the  income  statistics  of  Prus- 
sia, which  are  probably  more  accurate  than  those  of  any  other  country. 
Supposing  that  all  incomes  now  above  $1200  per  annum  were  reduced  to 
that  amount,  and  the  surplus  distributed  equally  among  all  the  inhabitants 
of  Prussia,  the  income  of  each  would  be  increased  by  only  $25. 

This  recalls  the  familiar  anecdote  concerning  the  Frankfort  banker  Roths- 
child, who  was  taken  by  surprise  by  a  few  rogues  during  the  revolution  of 
1848.  The  rogues  demanded  that  Rothschild  share  his  wealth.  The  banker 
asked  them  how  high  they  estimated  his  fortune  and  what  was  at  that  time 
the  population  of  Prussia.  Dividing  his  wealth  by  the  total  population,  it 
was  discovered  that  the  share  of  each  inhabitant  would  be  about  two  dollars, 


COMMUNISTIC    DISTRIBUTION  459 

deny  it?  But  we  must  admit  that  in  the  event  of  such 
a  change  the  economic  position  of  each  citizen  would  more 
closely  approach  poverty  than  opulence.  Such  a  change 
as  this,  moreover,  would  involve  a  general  expropriation 
and  perhaps  an  appeal  to  violence,  and  would  be  much 
too  dearly  purchased.  Could  not  this  modest,  rather  com- 
monplace ideal  be  attained  by  more  peaceful  methods  ? 

II.  Communism 

Every  unbiassed  thinker  will  admit  that  under  modern 
economic  conditions  equal  division  is  absurd.  But  is  it 
necessary  to  divide  wealth  at  all  ?  As  every  kind  of 
division  would  simply  give  rise  to  new  inequalities,  why  not 
regard  all  wealth  as  belonging  to  everybody,  and  consider 
the  members  of  society  as  one  would  the  members  of  the 
same  family  ?  As  in  the  family,  let  every  one  consume 
according  to  his  wants. 

Such  is  the  simplest  and  the  oldest  of  all  systems  of  social- 
ism.1 But  this  system  had  already  begun  to  be  somewhat 

whereupon  Rothschild,  to  their  stupefaction,  paid  each  of  them  this  sum  as 
his  share  and  dismissed  them. 

Socialists  would  probably  object  that  under  a  new  productive  system  the 
sum  total  of  wealth  would  be  increased.  But  this  remains  to  be  proved. 
There  are,  in  fact,  good  reasons  for  believing  that  it  would  be  diminished. 

1  The  authors  who  have  developed  theories  more  or  less  communistic  are 
very  numerous,  beginning  with  Plato's  "  Republic  "  ;  but  the  most  recent  and 
most  celebrated  are  Gracchus  Babeuf,  Robert  Owen,  and  Etienne  Cabet. 

Babeuf,  who  called  himself  Gracchus,  because  he  regarded  the  Roman 
tribune  of  that  name  (who  voted  for  the  agrarian  laws)  as  a  socialist,  was 
the  leader  of  the  conspiracy  of  the  "  Equals"  under  the  French  Directorate. 
He  was  sentenced  to  death  in  1797,  and  executed.  Babeuf  prepared  a 
scheme  of  social  organization,  the  program  of  which  began  with  the 
words,  "Nature  gave  every  man  an  equal  right  to  the  enjoyment  of  all 
things." 

Owen  was  born  in  North  Wales  in  1771,  and  died  in  1857.  He  was  not 
a  revolutionary  or  democratic  communist,  but  what  might  be  called  a  pater- 
nalistic communist.  He  expected  social  reform  to  come  from  the  upper 
classes.  A  rich  employer  of  labor,  and  the  proprietor  of  a  factory  at  New 
Lanark,  he  inaugurated  many  of  the  philanthropic  features  of  modern  indus- 


460  PRINCIPLES   OF   POLITICAL   ECONOMY 

out  of  date  and  even  ridiculous,  when,  quite  recently,  the 
anarchists  took  up  the  theory  and  gave  it  a  new  lease  of  life. 
It  must  not  be  imagined  that  anarchism  is  based  prin- 
cipally on  the  theory  of  the  community  of  goods.  The 
essential  purpose  and  aim  of  anarchism  is  the  complete  and 
unrestrained  development  of  human  individuality.  But 
many  anarchists  regard  communism  as  the  sole  means  of 
attaining  this  purpose.  They  believe  that  private  property, 
no  matter  how  narrow  a  scope  we  may  give  it,  always  im- 
plies the  existence  of  some  limitation  of  personal  rights  and 
the  establishment  of  an  authority  or  power  charged  with  the 
business  of  compelling  the  observance  of  this  limitation. 
They  hold  that  the  private  possession  of  anything  whatso- 
ever will  always  be  an  obstacle  in  the  way  of  those  that 
possess  nothing,  and  will  become  a  means  of  exploiting  those 
that  have  no  property.  Hence  the  only  method  of  distri- 
bution which  receives  their  approval  is  that  of  "  taking  just 
what  you  want "  from  the  common  store. 

trial  life:  reduced  hours  of  labor,  prohibition  of  child  labor,  cooperative 
societies  among  laborers,  savings  banks,  and  even  non-sectarian  schools. 
But  he  was  not  content  with  these  improvements,  and  began  to  organize 
communistic  societies,  one  of  which  was  founded  in  the  United  States  at 
New  Harmony,  Indiana  (1826).  This  attempt  failed  completely.  The 
cooperative  movement,  however,  and  the  English  factory  laws  owe  much  to 
Owen  as  their  real  founder. 

Cabet,  the  author  of  a  romance,  written  in  imitation  of  Sir  Thomas 
More's  "Utopia,"  entitled  "Icaria,"  founded  a  society  of  Icarians  in 
the  United  States,  in  1848.  The*  history  of  this  community,  which  was 
first  situated  in  Texas,  then  at  Nauvoo,  Illinois,  and  subsequently  in  Iowa, 
has  been  largely  one  of  intestine  quarrels.  It  has  recently  been  disbanded. 

It  is  a  mistake  to  classify  Fourier  among  communists.  In  reality,  Fourier 
was  a  communist  only  as  regards  the  consumption  and  production  of  wealth, 
but  not  as  regards  its  distribution.  He  considered  life  in  common  (in  the 
"  phalanstery  ")  only  as  a  means  of  organizing  production  and  consumption 
on  a  more  economic  basis,  but  by  no  means  as  aiming  at  the  establishment 
of  equality  among  men.  Fourier  declares  expressly  that  his  system  permits 
the  continuation  not  only  of  the  inequalities  which  result  from  labor  and 
talent,  but  also  of  those  which  result  from  unequal  contributions  of  capital. 
(See  the  "Selections  from  the  Works  of  Fourier,"  by  Charles  Gide,  trans- 
lated by  J.  Franklin.  London,  1901.) 


IMPOSSIBILITY   OF   UNRESTRICTED   DISTRIBUTION      461 

It  must  be  admitted  that  the  rule,  "  To  each  according  to 
his  wants,"  would  be  the  most  agreeable  one.1  But  wealth 
would  necessarily  have  to  exist  in  unlimited  or  at  least 
superabundant  quantities,  if  every  one  could  take  whatever 
he  wanted  in  such  amounts  as  pleased  him  —  just  as  we  now 
take  the  air  or  water  that  we  want. 

Unfortunately  this  is  not  the  case.  The  amount  of  wealth 
is,  and  probably  always  will  be,  insufficient  for  the  satisfac- 
tion of  our  wants  or  our  desires,  because  our  wants  and 
desires  increase  in  direct  proportion  to  the  facility  with 
which  we  can  satisfy  them.  Hence,  "  taking  just  what  you 
want "  is  impossible,  and  some  method  for  sharing  must  be 
devised.2  In  the  family,  distribution  is  done  by  the  author- 
ity of  the  father  or  mother,  who  gives  a  certain  share  to  each 
member.  But  what  authority  in  society  shall  be  intrusted 
with  this  difficult  task  ?  There  can  be  no  such  authority, 
because  the  social  plan  of  these  communistic  anarchists 
involves  the  suppression  of  all  authority  and  all  government. 
Their  motto  is,  Neither  God  nor  Master.  All  will  be  ad- 
justed, they  assert,  by  way  of  mutual  concessions,  the  ex- 
ercise of  good-will  and  the  feeling  of  fellowship.  But  it 
is  obvious  that  there  can  be  no  justification  for  an  assertion 
like  this,  —  so  contrary  to  all  that  we  know  of  human  nature. 

It  must  be  borne  in  mind  that  we  do  not  say,  as  some- 
times has  been  said  erroneously,  that  a  communistic  organi- 
zation of  society  is  absolutely  chimerical.  Communism 
certainly  did  exist  at  the  origin  of  a  large  number  of  human 

1  We  do  not  say  that  it  would  be  the  most  equitable  rule  (as  is  sometimes 
said),  because  it  is  difficult  to  see  in  what  manner  great  wants  can  be 
regarded  as  justifying  great  claims.     Modest,  temperate  people  would  always 
lose  by  such  a  rule  as  this.    Professor  Gustav  Schmoller  has  well  said  :  "It 
is  a  gross  error  to  make  our  wants  a  standard  of  distributive  justice,  for 
our  wants  necessarily  have  an  egoistic  character.      Only  labor,  merit,  and 
services    can   serve  mankind,  and  consequently  constitute   a  standard  of 
distributive  justice." 

2  Anarchists,  to  be  sure,  suppose  that  all  sharing  will  be  made  unneces- 
sary by  the  superabundance  of  wealth.       (See  especially  the  books  of 
Kropotkin.) 


462  PBINCIPLES   OF   POLITICAL  ECONOMY 

societies,  although  perhaps  not  at  the  origin  of  all.  Nor  do 
we  hold  that  its  realization  on  a  small  scale  is  now  impossible  ; 
because,  aside  from  religious  communities,  there  are  com- 
munistic societies  in  the  United  States l  which  have  already 
been  in  existence  nearly  a  hundred  years,  while  new  ones 
are  being  founded  from  year  to  year.  Although  they  have 
accomplished  nothing  very  remarkable,  they  have,  neverthe- 
less, proved  by  their  existence  that  the  community  of  goods 
is  not  absolutely  incompatible  with  labor  and  production. 
But  note  what  have  been,  and  must  be,  the  conditions  of  their 
relative  success :  — 

(1)  These  communities  must  be  very  small,  and  not  exceed 
a  few  hundred  or  a  thousand  members.2 

This  point  is  generally  admitted  by  communists  them- 
selves. Fourier  fixed  the  maximum  number  of  persons  in  a 
phalanstery  at  1500.  Owen  fixed  the  number  between  500 
and  2000.  Anarchists  would  suppress  the  central  govern- 
ment and  the  nation,  and  base  their  communistic  society 
on  the  independent  commune.  The  reason  for  this  is  quite 
obvious:  with  every  increase  in  the  number  of  associates 
the  proportional  interest  of  each  member  in  the  success 
of  the  enterprise  decreases.  When  the  number  is  very  small 
each  member  may  hope  to  profit  to  a  perceptible  degree  by 
his  own  efforts ;  but  in  a  communistic  society  which  should 
include  all  Americans,  the  interest  of  each  member  would  be 
only  one  eighty  millionth  part  of  the  whole  —  a  fraction 
scarcely  large  enough  to  stimulate  any  one's  personal  zeal. 

It  cannot  be  said  that  the  political  evolution  of  modern 
society  appears  to  be  tending  toward  the  autonomy  of  local 
communities  and  the  suppression  of  national,  central  govern- 
ments. On  the  contrary,  all  seems  to  point  to  centralization, 
the  extension  of  the  scope  of  government,  the  triumph  of  the 
principle  of  nationality  and  of  imperialism.  Even  if  it  were 

1  Consult  Nordhoff,  "  Communistic  Societies,"  Richard  T.  Ely,"  The  Labor 
Movement  in  America,"  and  Bulletin  No.  35  of  the  U.S.  Labor  Department. 

2  All  those  which  exist  in  the  United  States  are  small  in  numbers. 


THE   NECESSITY   OF   DISCIPLINE  463 

possible  to  substitute  independent  communes  for  the  central 
government,  there  would  still  be  rich  communes  and  poor 
communes  ;  the  inequality  of  individuals  would  simply  make 
way  for  the  inequality  of  local  groups. 

(2)  These  communities  must  be  subjected  to  very  strict 
discipline.  It  is  easy  to  see  a  priori  that  the  community 
of  life,  and  equal  treatment  for  all,  must  be  incompatible 
with  every  encroachment  by  which  one  individual  tries  to 
consume  more  than  his  share,  and  with  every  emancipatory 
idea  of  trying  to  escape  one's  share  of  the  burden.  Expe- 
rience shows  that  the  tendency  is  for  members  to  try  to 
evade  the  rules  and  to  shirk  the  burdens  put  upon  them, 
for  in  all  the  establishments  in  which  there  is  life  in  common 
—  convents,  military  barracks,  and  schools  —  there  is  in- 
variably a  strict  insistence  upon  obedience.1  It  should  be 
noted  in  almost  all  cases  that  religious  feeling  carried  almost 
to  the  point  of  fanaticism  has  alone  been  potent  enough  to 
secure  that  strict  discipline  which  is  necessary  to  the  exist- 
ence of  these  communities.  All  the  communistic  societies 
of  the  United  States,  except  that  of  the  Icarians  (which  dis- 
banded in  1896),  are  of  a  religious  nature  ;  and  the  Jesuit 
republics  in  Paraguay  —  really  the  only  examples  which  are 
large  enough,  and  have  lasted  long  enough,  to  justify  speak- 
ing of  them  —  constitute  veritable  theocracies. 

The  practice  of  the  communistic  regime,  when  combined 
with  the  anarchistic  ideal  involving  the  abolition  of  all  dis- 
cipline and  all  regulation,  is  entirely  absurd,  and  at  all 
events  seems  thoroughly  incompatible  with  the  tendencies  of 
modern  life. 

1  The  history  of  the  republic  of  Icaria  fully  demonstrates  this  fact.  New 
members  constantly  attempted  to  escape  the  rules  which  they  found  odious. 
Cabet  himself  tried  vainly  to  obtain  dictatorial  power  in  the  interest  of  the 
community.  The  Rules  of  the  Icarian  Colony  (1856)  give  interesting  proof : 
"Art.  4.  Be  prompted  by  your  devotion  to  the  community.  .  .  .  Art.  16. 
Bind  yourself  to  perform  the  work  assigned  to  you  by  the  management.  .  .  . 
Art.  26.  Have  no  preferences  or  dislikes  in  the  matter  of  food.  .  .  .  Art.  27. 
Bear  with  resignation  the  discomforts  of  life  in  common.  .  .  .  Art.  37. 
Bear  whatever  discipline  is  imposed." 


464  PRINCIPLES   OF   POLITICAL   ECONOMY 


III.   Saint-Simonism  and  Inheritance 

The  school  of  Saint-Simon,  to-day  forgotten,  exerted  a 
remarkable  influence  upon  an  entire  generation  of  French 
thinkers,  and  even  upon  those  of  other  countries,  in  the 
early  part  of  the  nineteenth  century.1  Although  this  school 
now  is  interesting  only  from  the  historical  point  of  view,  we 
must,  nevertheless,  say  a  word  about  it  because  it  proposed 
a  very  attractive  rule  of  distribution.  The  school  of  Saint- 
Simon  insisted  strongly  on  the  claims  of  merit.  They  advo- 
cated a  social  hierarchy  in  which  each  one  should  labor 
according  to  his  capacity  and  be  rewarded  according  to  the 
services  rendered. 

This  school  accepted  sincerely  and  literally  the  oft-ex- 
pressed thought  that  every  man,  even  the  master  of  an  indus- 
trial concern  or  the  mere  possessor  of  a  fortune,  performs  a 
"social  function."  The  Saint-Simonians  attempted  to  carry 
out  this  principle  in  practice.  All  trades,  professions,  and 
other  branches  of  human  activity  they  would  turn  into 
public  offices,  in  the  strictest  sense  of  the  term  ;  that  is  to  say, 
people  should  be  appointed  to  these  positions,  and  remun- 
erated, by  the  government. 

Saint-Simonism,  therefore,  is  a  kind  of  socialism,  with  the 
peculiarity  of  being  an  aristocratic  socialism.  Far  from  for- 
bidding the  existence  of  factory  owners,  capitalists,  or  even 
bankers,  this  school  confers  upon  them  the  right  to  govern 
society  and  to  occupy  a  rank  inferior  only  to  that  of  scien- 
tists and  priests.  It  is  not  opposed  to  social  inequality, 
but  proposes  to  replace  the  inequality  due  to  wealth  by 
that  due  to  individual  merit.  This  is  the  thought  expressed 

1  Saint-Simon  died  in  1825,  and  left  behind  him  a  politico-religious  system 
which  is  more  or  less  incoherent,  but  nevertheless  characterized  by  occasional 
flashes  of  genius.  His  followers  constituted  a  large  group  of  influential 
men  who  literally  fascinated  the  most  distinguished  thinkers  of  that  period. 
Two  of  his  disciples,  Bazard  and  Enfantin,  added  largely  to  his  teaching  and 
made  it  far  more  accurate,  especially  from  the  economic  point  of  view. 


INHERITANCE  465 

by  their  celebrated  formula,  "To  each  according  to  his 
capacity,  measuring  capacity  by  works."  The  French  Revo- 
lution, they  declared,  was  a  failure  because,  although  it  put 
an  end  to  all  the  political,  fiscal,  and  civil  privileges  due  to 
the  accident  of  birth,  it  paid  no  attention  to  one  privilege, 
the  greatest  and  most  absurd  of  all,  namely,  that  of  wealth. 
Logically,  the  French  Revolution  should  have  abolished  in- 
heritance in  all  its  forms,  and  especially  in  the  most  impor- 
tant social  functions  —  those  of  the  landed  proprietor,  the 
capitalist,  and  the  employer. 

Thus  the  abolition  of  inheritance  is  the  keystone  of  the 
Saint-Simonian  system.  It  is  impossible  for  us  here  to  dis- 
cuss this  system  in  detail,  but  there  are  some  points  which 
should  be  brought  out  with  regard  to  it :  — 

(1)  Admitting  for  a  moment  that  we  might  succeed  in 
abolishing  the  inheritance  of  wealth,  inheritance  would  still 
exist  with  regard  to  many  other  advantages,  such  as  health, 
talent,  mental  traits,  social  rank,  and  even  the  family  name, 
which,  in    carrying  on  an  enterprise  or  getting    a  wife,  is 
worth    a    fortune.      Surely,    nature   herself   plainly   seems 
to    have    established    the     principle     of     inheritance    and 
heredity. 

(2)  It   cannot  be  denied  that  by  depriving  men  of  the 
right  to  dispose  of  the  results  of  their  labor  we  should  be 
attenuating  one  of  the  most  powerful  incentives  to  production. 
Goods  which  we  have  no  right  to  dispose  of  as  we  think  best, 
and  which  we  should  be  unable  to  give  away  or  bequeath  to 
whomsoever  we  please,  would  lose  a  large  part  of  their  utility. 
They  would  be  less  desired,  and  we  should  make  less  effort 
to  produce  or  obtain  them.    And  we  must  admit  —  in  simple 
justice  to  the  nobility  of  human  nature  —  that  there  are  many 
persons  who  work  and  save  for  others,  not  only  for  them- 
selves.   If  you  oblige  them  to  think  only  of  themselves,  they 
will  work  less  and  spend  more.     What  a  vast  amount  of 
wealth  would  thus  be  transferred  from  productive  uses  to 
unproductive  consumption!     How  many  years  would   thus 


466  PRINCIPLES   OF   POLITICAL   ECONOMY 

be  withdrawn  from  productive  activity  and  spent  in  prema- 
ture retreat  from  active  life! 

(3)  If,  finally,  we  admit,  in  agreement  with  the  Saint- 
Simonians,  that  the  possession  of  riches  constitutes  a  social 
office,  is  it  not  logical  to  conclude  that  the  person  who  exer- 
cises this  function  is  better  able  than  any  one  else  (even  the 
government)  to  designate  a  proper  successor  —  just  as  the 
Roman  emperors  themselves  designated  the  future  Csesar  ? l 

If,  in  the  Saint-Simonian  system,  the  head  of  the  family  is 
not  permitted  to  designate  his  heirs,  who,  then,  is  to  be  en- 
trusted with  the  duty  of  designating  the  most  capable  and 
worthy  successor  ?  Shall  the  government  appoint  each  indi- 
vidual to  a  particular  occupation,  precisely  as  to-day  the 
state  appoints  its  officials,  giving  them  a  rank  and  salary  pro- 
portionate to  their  supposed  merit  and  services  ?  Such  a 
government  would  have  to  be  as  infallible  as  the  Pope  —  as 
infallible  as  "  the  Priest  "  was  really  assumed  to  be  by  Saint- 
Simon,  —  to  justify  the  exercise  of  so  great  a  power.  Would 
it  not  generally  be  conceded  that  wealth  is  now  distributed 
much  less  unjustly  by  the  accident  of  birth  than  if  it  were 
distributed  according  to  the  favor  and  arbitrary  will  of  some 
sort  of  a  pontiff  ? 

And  even  if,  instead  of  the  choice  of  the  government, 
appointments  took  place  by  popular  vote,  we  may  be  sure 
that  the  most  capable  would  not  secure  the  positions  for 
which  they  are  best  adapted.  Nor  would  anything  be 
gained,  finall}-,  by  adopting  a  system  of  competitive  exami- 
nations covering  all  kinds  of  labor  and  all  manner  of  func- 
tions from  the  lowest  to  the  highest ;  for  this  would  probably 
result  in  the  worst  kind  of  mandarinism.  Therefore  it  seems 
foolish  to  regard  the  abolition  of  inheritance  as  the  proper 
means  of  realizing  the  distributive  formula  of  the  Saint- 
Simonian  school :  To  each  according  to  his  capacity,  measur- 
ing capacities  by  services.  It  is,  at  all  events,  unwarranted 

1  It  should  be  noted  that  this  argument  can  justify  only  inheritance  by 
will ;  the  first  argument  is  rather  a  defence  of  intestate  inheritance. 


COLLECTIVISM  467 

to  take  it  for  granted  that  the  proposed  system  would  be  an 
improvement  on  the  present  competitive  system.  We  may 
properly  ask,  moreover,  even  from  the  standpoint  of  ideal 
justice,  whether  the  Saint-Simonian  principle  possesses  the 
ethical  value  ascribed  to  it.  May  one  not  reasonably  hold  that 
intellectual  or  physical  superiority  ought  not  to  be  a  claim 
to  greater  wealth  or  greater  remuneration  than  that  received 
by  those  who  are  less  gifted  ?  Is  not  exceptional  intelligence 
or  physical  superiority  in  itself  a  sufficient  advantage,  little 
requiring  to  be  emphasized  by  the  additional  privilege  of 
claiming  a  larger  share  of  material  wealth  ? 

IV.    Collectivism 

Collectivism  is  a  moderate  form  of  communism.  It  in- 
volves the  common  ownership  of  only  the  instruments  of 
production,  —  land  and  capital ;  products  are  still  left  under 
the  regime  of  private  property,  although  collectivists  desire 
a  more  equitable  distribution  of  them.1 

Collectivism  does  not  pretend  to  be  a  scheme  of  social 
organization  founded  on  abstract  principles  of  justice. 

1  Collectivism  is  of  quite  recent  date.  The  term  seems  to  have  been  used 
first  by  a  Belgian  writer,  Colins,  (1850)  ;  but  the  collectivism  of  Colins  was 
largely  agrarian.  The  distinction  between  instruments  of  production  and  ob- 
jects of  consumption,  —  which  lies  at  the  basis  of  the  collectivist  theory,  — 
was  made  by  Pecqueur  in  1838,  and  Vidal  in  1846.  The  first  systematic,  ag- 
gressive statement  of  the  doctrine,  however,  was  made  by  Marx  and  Engels 
in  their  famous  "  Communistic  Manifesto,"  issued  in  1847. 

Ferdinand  Lassalle  and  especially  Karl  Marx  (the  first  volume  of  whose 
celebrated  book  on  "Capital"  appeared  in  1867,  and  two  more  since  his 
death)  developed  an  elaborate  economic  doctrine  of  collectivism  which 
constitutes  the  arsenal  from  which  collectivists  for  more  than  thirty  years 
have  drawn  their  most  effective  weapons  for  attacking  the  present  social 
system. 

Ce"sar  de  Paepe,  a  Belgian  (who  died  in  1891)  was  the  first  to  sketch  a 
complete  scheme  of  collectivist  organization. 

Although  collectivism  is  often  designated  as  "  Marxism,"  in  honor  of  its 
most  illustrious  theorist,  not  all  collectivists  are  disciples  of  Karl  Marx. 
The  "Fabian  Society"  in  England,  and  the  so-called  "independent"  col- 
lectivists in  France,  do  not,  strictly  speaking,  belong  to  the  school  of  Marx. 


468  PRINCIPLES    OF   POLITICAL   ECONOMY 

Unlike  so-called  Utopian  socialism  or  idealistic  socialism, 
it  purports  simply  to  investigate  the  forces  which  are  at 
work  in  social  evolution,  and  to  discover  as  the  result  of 
this  investigation  that  modern  society  is  inevitably  tending 
toward  a  new  order  of  things.  Unchangeable  laws  of 
social  progress  have  brought  about  the  development  of 
large-scale  production,  large-scale  trade,  and  the  concentra- 
tion of  property  in  the  hands  of  fewer  and  fewer  persons. 
All  these  changes  are  gradually  doing  away  with  small- 
scale  individualistic  methods  of  production  and  substituting 
collective,  production  in  their  stead.  Property  must  be 
individualistic  when  production  is  individualistic.  The 
system  of  production  and  that  of  distribution  have  hitherto 
been  in  perfect  harmony  with  each  other ;  the  small  medi- 
aeval workshop  was  an  example  of  this.  But  industry, 
trade,  and  property,  have  now  entered  upon  a  new  period, 
characterized  by  large-scale  methods.  The  scope  of  individual 
production  is  steadily  being  narrowed,  while  that  of  large- 
scale  collective  enterprise  is  constantly  widening.  Examples 
of  this  are  numerous  enough  to  challenge  the  attention  of  the 
most  casual  observer  :  large  factories,  great  mining  and 
manufacturing  enterprises,  railroad  companies,  department 
stores,  trusts  and  industrial  combinations  of  all  kinds.  Dis- 
tribution, however,  continues  to  be  founded  on  private,  in- 
dividualistic property  ;  that  is  to  say,  on  a  legal  system  which 
is  no  longer  adapted  to  the  actual  economic  organization  of 
society.  There  is  consequently  at  the  basis  of  modern  society 
a  growing  incompatibility,  an  antagonism,  between  its  legal 
and  its  economic  structure,  which  will  ultimately  result  in 
the  collapse  of  the  present  capitalistic  regime  and  the  aboli- 
tion of  private  property  in  the  instruments  of  collective  pro-' 
duction.  The  invincible  logic  of  evolution  teaches  that 
collective  methods  of  production  require  a  collective  system  of 
ownership. 

As  we  have  said,  collectivism  differs  from  communism  in 
that  the  latter  seeks  to  establish  the  common  ownership  of 


COLLECTIVE  PRODUCTION  469 

all  goods  without  exception,  whereas  the  former  advocates 
common  ownership  only  in  the  instruments  of  production, 
consumers'  goods  remaining  subject  to  private  ownership. 
To  be  more  accurate,  we  should  add  that  collectivism  at 
present  does  not  even  advocate  the  common  ownership  of  all 
the  instruments  of  production,  but  only  of  those  that  are  ex- 
ploited collectively,  i.e.  by  means  of  the  employment  of 
wage-workers.  Thus  the  land  cultivated  by  its  owner,  the 
boat  which  belongs  to  the  fisherman,  the  mechanic's  own 
workshop,  —  although  these  are  all  instruments  of  pro- 
duction, —  as  long  as  they  are  really  under  the  control  of  the 
individual  and  are  really  the  means  of  individual  production, 
will  not  be  transferred  to  social  ownership.1 

Collectivists  assert,2  however,  that  in  the  due  course  of 
economic  evolution  all  the  present  forms  of  individualistic 
production  are  bound  to  disappear  :  they  will  either  be 
eliminated  by  the  increasing  pressure  of  competition,  which 
small  concerns  cannot  withstand,  or  by  voluntary  trans- 
formation into  collective  enterprises.  And  as  the  evolution 
of  property  is  necessarily  parallel  to  that  of  production,  the 
time  must  come  when  all  the  instruments  of  production  will 
be  transferred  to  collective  ownership. 

It  must  be  admitted  that  expropriation  3  is  practically  the 

1  As  long  as  the  instruments  of  production  are  still  in  the  hands  of  the 
laborer,  collectivists  do  not  regard  them  as  capital,  in  the  sense  in  which  they 
employ  that  term.     (See  page  118.)     They  are,  therefore,  logical  in  their 
programme. 

2  It  would  be  better  to  say  that  collectivists  formerly  made  this  assertion, 
for  now  they  appear  to  prefer  leaving  this  point  in  obscurity.     The  collecti- 
vist  party  in  its  political  programmes  sometimes  designates  itself  as  the  true 
and  only  defender  of  small  land-holdings,  of  the  small  workshop,  and  of  the 
small  storekeeper.     In  Germany  the  socialist  party  is  divided  on  this  pointy 
the  opportunists  follow  the  same  plan  as  in   France  and  endeavor  not  to 
antagonize  the  small  landowner,  whereas  the  faithful  disciples  of  Marx  de- 
clare, —  and  rightly  declare,  —  that  this  is  contrary  to  the  true  principles  of 
Marxism.  * 

3  With  or  without  indemnification  ?    Moderate  collectivists  favor  indem- 
nification, provided  the  propertied  classes  are  willing  to  submit  with  good 
grace  to  the  process  of  "  socialization."    But  if  these  class.es  offer  resistance, 


470  PRINCIPLES    OF    POLITICAL    ECONOMY 

only  means  of  accomplishing  this  transfer  of  private  property 
to  collective  ownership.  This  will  be  the  last  step  in  that 
class  conflict,  begun  many  centuries  ago,  which  KarL  Marx 
regards  as  the  most  fundamental  fact  of  history  and  as  the 
key  to  all  historical  events. 

Collectivists  declare  that  when  expropriation  has  taken 
place,  the  instruments  of  production  will  be  utilized  by  the 
nation  or  the  commune,  either  directly  or  by  means  of  trades 
unions  or  labor  groups.  The  proceeds  will  be  paid  into  the 
national  treasury,  which,  after  deducting  the  part  necessary 
to  meet  the  general  expenses  of  society,1  will  give  back  the 
surplus  to  the  laborers,  who  may  then  dispose  of  it  exclu- 
sively and  entirely  as  their  own  property. 

But  according  to  what  formula  would  products  be  dis- 
tributed among  the  producers?  Although  this  is  regarded 
as  a  question  of  secondary  importance,  collectivism  also  has 
its  distinctive  formula  of  distributive  justice.  Unlike  the 
communistic  formula,  which  gives  to  each  according  to 
his  wants,  collectivism  proposes  to  reward  each  person 
according  to  the  effort  he  has  made,  measured  by  the  number  of 

the  collectivists  favor  expropriation  pure  and  simple,  and  an  appeal  to  force. 
Everybody  knows  that  in  reality  the  second  alternative  is  the  only  possible 
one.  In  the  first  place,  it  would  be  impossible  to  find  the  sum  of  money 
necessary  to  indemnify  the  owners  (about  ninety  billion  dollars  in  the  United 
States)  ;  and,  in  the  second  place,  admitting  even  that  the  owners  received 
some  sort  of  indemnification,  this  indemnification  (probably  in  the  shape  of 
coupons  with  which  to  purchase  goods  at  the  social  stores)  could  not  give  rise 
to  interest  or  revenue  of  any  kind,  and  would  doubtless  be  worth  no  more 
than  mere  assignats. 

1  These  general  expenses  would  be  much  greater  than  present  taxes,  because 
they  would  have  to  cover  the  cost  of  keeping  all  the  children,  old  persons,  and 
invalids,  as  well  as  the  cost  of  insurance  against  risks  of  all  kinds,  and  the 
cost  of  maintaining  all  productive  establishments  and  equipment  (since  all 
these  belong  to  society).  Some  provision  would  also  have  to  be  made  for 
forming  a  reserve  fund  to  maintain  and  increase  the  social  capital. 

It  is  true,  on  the  other  hand,  that  public  expenses  would  be  reduced  by 
the  interest  on  the  public  debt,  which  would  no  longer  be  paid,  and,  the 
collectivists  believe,  all  expenditures  for  the  army  and  navy,  because  there 
would  be  no  more  war. 


COLLECTIVIST    DISTRIBUTION  471 

hours  he  has  worked .l  Those  who  are  unable  to  work 
receive  a  certain  minimum  allowance. 

In  the  official  statements  of  their  views,  collectivists 
maintain  that  this  partial  communism  would  suffice  to  re- 
move the  defects  of  the  present  social  system. 

First  of  all,  they  declare,  it  would  result  in  the  disappear- 
ance of  extreme  economic  inequalities,  for  these  inequalities 
have  no  other  cause  than  the  accumulation  of  capital  and 
land  in  the  hands  of  a  few  families.  The  accumulation 
of  capital  takes  place  with  increasing  rapidity,  much  as  a 
snowball  gathers  volume  and  momentum  as  it  rolls  down  a 
hillside.  This  rapid  increase  is  due  to  inheritance,  loan  at 
interest,  and  the  creation  of  incomes  by  the  aid  of  hired 
labor.  Capital  permits  its  owners  to  grow  rich  by  the  labor 
of  others.  But  as,  under  collectivism,  no  one  would  be  able 
to  profit  except  by  his  own  labor,  economic  inequalities  would 
be  greatly  reduced.2 

It  would,  they  hold,  do  away  with  the  idle  classes  and 
social  parasitism.  When  no  one  can  become  the  exclusive 
owner  of  land  or  capital,  it  is  obvious  that  there  will  be 
no  room  for  persons  who  live  on  incomes  due  to  invested  capi- 
tal or  to  the  possession  of  real  estate.  When  these  sources 
of  supply  are  cut  off,  such  persons  will  be  compelled  to  work. 

It  would  eliminate  excessive  labor.  In  the  first  place,  the 
proceeds  of  productive  activity  would  be  increased  by  that 

1  "The  quantity  of  labor  is  measured  by   its   duration.  .  .  .     But  the 
labor  which  constitutes  the  substance  of  values   is  equal,  uniform  human 
labor,  the  expenditure  of  the  same  intensity  of  labor-power."  —  KARL  MARX. 

2  Collectivism,   however,  does  not  do  away  with  inheritance,  as  is  fre- 
quently supposed.     If  a  man  has  accumulated  anything  and  cares  to  transfer 
it  to  some  one  else,  collectivists  would  not  object ;  the  beneficiary  might  live 
without  working,  — as  long  as  the  inheritance  lasted. 

This  concession  may  appear  surprising  at  first,  unless  we  recall  that 
collectivism  excludes  land  and  capital  from  the  domain  of  private  property, 
that  is  to  say,  practically  the  only  kinds  of  wealth  which  are  productive 
and  lasting,  and  the  only  kinds  which  give  rise  to  permanent  inequalities. 
Hence  inheritability  is  limited  to  objects  of  consumption,  and  has  but  little 
importance. 


472  PRINCIPLES   OF  POLITICAL   ECONOMY 

share  which  was  previously  appropriated  by  the  idlers  and  the 
parasites ;  and,  in  the  second  place,  as  all  useless  and  absurd 
branches  of  production  would  be  abandoned,  the  labor  re- 
quired of  each  member  of  society  would  be  greatly  decreased. 
Four  hours  at  the  most,  and  perhaps  three,  would  suffice  to 
secure  the  same  results  as  are  now  achieved ;  an  English 
socialist  has  calculated  that  even  one  hour  and  twenty 
minutes  per  day  would  be  enough ! 

It  is  held,  moreover,  that  collectivism  would  do  away  with 
pauperism.  For  if  society  as  a  whole  became  the  owner  of  all 
the  land  and  all  the  capital,  society  would  find  employment  for 
all  who  were  able  to  work ;  and  for  those  who  were  unable  to 
work,  society  would  at  least  provide  the  means  of  existence. 

Collectivists  maintain,  finally,  that  by  recognizing  property 
in  the  product  of  one's  own  labor  and  the  right  to  dispose 
freely  of  one's  possessions,  individual  liberty  would  be  kept 
perfectly  intact;  and  that  this  social  system  would  obviate 
entirely  the  danger  of  communistic  tyranny  or  the  necessity 
of  living  in  the  uniform,  disciplined  manner  of  a  communistic 
familistery. 

In  answer  to  these  assertions  of  the  collectivists,  the  fol- 
lowing points  may  be  raised :  — 

(1)  The  so-called  law  of  social  evolution  upon  which 
collectivism  is  founded,  viz.  the  gradual  transformation  of 
individual,  isolated  production  into  collective  production,  is 
only  a  sweeping  generalization;  it  does  not  cover  all  the 
facts  of  social  evolution,  and  is  contradicted  by  many  of 
them.  We  have  already  pointed  out  (see  pages  166  f¥.) 
that  in  agricultural  production  there  is,  in  spite  of  collec- 
tivist  assertions  to  the  contrary,  no  proof  whatever  of  this 
tendency  to  large-scale  production.  On  the  contrary,  the 
land  is  being  divided  into  smaller  sections,  and  the  average 
size  of  the  farm  tends  to  decrease  with  the  increased  density 
of  population  and  the  progress  of  intensive  methods  of 
farming.  Large-scale  methods  of  agriculture,  and  the  accu- 


CRITIQUE    OF    COLLECTIVISM  473 

mulation  of  property  in  land,  are  altogether  exceptional 
phenomena.  Even  in  manufacturing,  small  concerns  have 
not  been  driven  out  of  existence  by  large  enterprises,  but 
have  increased  quite  as  rapidly  as  the  latter.1 

It  is  therefore  highly  probable  that  collectivists,  tired  of 
waiting  patiently  for  the  termination  of  a  slow  evolutionary 
process  the  ultimate  result  of  which  seems  increasingly  uncer- 
tain, will  employ  violence  to  accomplish  their  purpose.  The 
change  thus  effected  may,  if  the  collectivists  should  obtain 
control  of  law-making,  preserve  all  the  forms  and  the  appear- 
ance of  perfect  legality;  the  violence  they  employ  may 
therefore  be  legal  violence.  But  the  change  would  be  none 
the  less  revolutionary.  An  ideal,  moreover,  that  can  be 
realized  only  by  an  appeal  to  force  must  necessarily  be  odious. 

(2)  The  right  of  private  property,  which  collectivists 
assert  they  are  simply  narrowing  somewhat  by  confining  it  to 
those  products  that  are  the  result  of  one's  own  labor,  would 
under  collectivism  be  a  mere  illusion.  For  if  the  owner- 
ship of  these  products  were  recognized,  and  possessed  all 
the  attributes  which  constitute  the  right  of  property  (espe- 
cially the  right  to  lend,  to  sell  and  to  exploit  as  a  source  of 
income),  it  would  again  give  rise  to  the  inequality  of  wealth  ; 
it  would,  moreover,  again  create  the  classes  of  creditors  and 
debtors,  employers  and  employees,  buyers  and  sellers,  and 
thus  rebuild  the  whole  economic  edifice  which  had  been  over- 
thrown. Hence  collectivists  expressly  stipulate  that  the  so- 
called  owner  of  "  property  "  would  in  no  case  be  permitted 

1  The  doctrine  of  the  increasing  concentration  of  property  and  production 
has  already  given  rise  to  lively  discussion  among  collectivists  themselves. 
Bernstein,  one  of  the  keenest  thinkers  in-  the  ranks  of  collectivists,  in  a  book 
which  created  quite  a  turmoil  ("  Zur  Geschichte  und  Theorie  des  Social  - 
ismus,"  Berlin,  1901),  attacked  this  doctrine  openly.  He  pointed  out,  for 
instance,  that  in  England  the  number  of  families  having  incomes  between 
$750  and  $5000  has  increased  to  more  than  three  times  what  it  was  thirty 
years  ago ;  the  number  of  small  workshops  employing  from  one  to  ten 
laborers  has  almost  doubled.  Many  new  occupations,  such  as  photography 
and  the  repairing  of  bicycles  and  automobiles,  have  sprung  up  and  given  rise 
to  a  great  number  of  small  shops. 


474  PRINCIPLES   OF   POLITICAL   ECONOMY 

to  sell  or  lend  his  share  of  the  productive  proceeds,  or  to 
use  it  as  a  means  of  employing  the  labor  of  others.1  He 
would  be  allowed  only  to  consume  it  or  keep  it  or  give  it 
away.  He  would  be  forbidden,  in  other  words,  to  use  it  for 
any  other  than  unproductive  purposes.  This  state  of  affairs 
would  not  be  very  reassuring  from  the  standpoint  of  pro- 
ductivity. It  is,  furthermore,  extremely  probable  that  the 
possessors  of  wealth  would  be  unwilling  to  accept  without  a 
protest  this  narrow  limitation  of  their  rights  as  owners. 
They  would  persistently  seek  to  make  a  more  profitable  and 
effective  use  of  their  "property";  and  this  would  be  likely 
to  necessitate  the  enactment  of  drastic  measures  to  prevent 
them  from  doing  this,  —  measures  singularly  vexatious  to 
those  who  cared  anything  for  individual  liberty.  At  all 
events,  the  right  of  property,  thus  emasculated  and  robbed 
of  its  most  essential  attributes,  would  become  a  mere  shadow, 
and  we  should  soon  degenerate  into  a  state  of  society  scarcely 
distinguishable  from  communism. 

Hence  it  is  a  vain  boast  for  the  collectivist  to  maintain 
that  his  system  is  a  happy  mean  between  communism  and 
the  individualistic  regime.  It  appears,  moreover,  that  collec- 
tivism must  ultimately  lead  to  the  former  of  these  social  sys- 
tems, unless,  indeed,  it  deliberately  reverts  to  the  latter. 

(3)  The  plan  to  substitute  "directors"  appointed  by 
society  or  elected  by  the  labor  unions,  for  all  the  "  captains 
of  industry,"  employers,  landowners,  and  capitalists,  is  well 
calculated  to  cause  grave  anxiety  in  the  minds  of  those  who 
have  any  knowledge  of  practical  industrial  conditions  and  of 
the  meagre  economic  training  of  the  laboring  classes. 

But  the  social  class  whose  disappearance  may  well  cause 
most  anxiety  is  that  of  the  capitalists  who  save.  There  are 

1  Will  he  be  permitted  to  use  it  as  a  means  of  producing  in  conjunction 
with  his  own  labor,  independently  of  others  ?  Collectivists  would  doubtless 
allow  this  provisionally,  that  is  to  say,  as  long  as  there  are  any  autonomous 
producers.  But  logically  this  would  not  be  compatible  with  collectivism, 
inasmuch  as  the  aim  of  the  collectivist  system  is  to  do  away  with  individual, 
isolated  production,  and  make  all  production  social  and  collective. 


CAPITAL   UNDER   COLLECTIVISM  475 

in  this  country  millions  of  large  and  small  capitalists, — 
especially  the  latter, —  who  together  save  many  millions  of 
dollars  each  year,  who  perform  the  exceedingly  important 
economic  function  of  maintaining  and  increasing  the  riches 
and  prosperity  of  the  nation,  and  augmenting  its  supply  of 
productive  capital.  They  do  this,  to  be  sure,  in  their  own 
interest,  not  because  the  economic  progress  of  society  demands 
it ;  but  the  outcome  is  of  no  less  vital  concern  for  the  entire 
nation. 

Under  a  collectivist  regime,  the  great  motive,  the  main- 
spring, of  individual  saving  would  be  destroyed.  Why? 
Because  it  is  very  unlikely  that  persons  who  are  sure  to 
receive  at  least  an  amount  of  wealth  sufficient  to  provide  the 
necessities  of  life  will  seek,  in  the  interest  of  society  as  a 
whole,  to  consume  less  or  to  cut  down  that  part  of  the  social 
proceeds  which  constitutes  their  share.  Let  us  even  admit 
that  some  persons  would  continue  to  put  aside  a  part  of  their 
income,  in  the  form  of  labor  coupons  or  certificates  or  what- 
ever medium  of  exchange  is  employed.  In  this  event  they 
would  keep  this  part  of  their  share  simply  for  the  satisfac- 
tion of  future  wants,  and  would  never  think  of  investing  it; 
in  fact,  they  could  not  do  so  even  if  they  desired,  because 
this  is  strictly  forbidden.  All  they  could  do  with  their  sav- 
ings would  be  to  hoard  them  unproductively,  and  in  a  manner 
which  furnished  no  advantage  or  utility  whatsoever  to  society 
as  a  whole. 

But  how,  we  must  therefore  inquire,  will  the  maintenance 
and  accretion  of  the  nation's  supply  of  capital  be  provided 
for,  when  the  formation  of  capital  by  private  saving  will 
have  been  done  away  with  ?  Public  saving  is  suggested  as 
a  substitute.  Society  as  a  whole,  we  are  told  by  the  collec- 
tivists,  would  do  precisely  as  financial  organizations  are  now 
in  the  habit  of  doing:  it  would  put  aside  10  or  20  per  cent  of 
its  proceeds  as  a  reserve  fund.  But  we  must  raise  the  ob- 
jection that  a  government  which  knows  how  to  save,  which 
is  willing  to  save,  and  which  is  able  to  save,  has  never  yet 


476  PRINCIPLES   OF   POLITICAL   ECONOMY 

been  known  to  exist;  we  are  therefore  asked  to  take  it  for 
granted  that  a  collectivist  government  will  in  this  respect 
be  entirely  unlike  all  kinds  of  government  that  have  pre- 
ceded it ;  that  it  would  be  economical  and  provident ;  that 
it  would,  in  brief,  possess  all  those  sterling,  conservative 
qualities  that  to-day  characterize  the  despised  small  capitalist 
and  the  successful  business  man. 

(4)  The  proposed  distributive  formula  immediately  gives 
rise  to  an  exceedingly  important  ethical  problem,1  viz. 
whether  each  member  of  society  would  be  rewarded  accord- 
ing to  the  labor  performed,  that  is  to  say  (as  the  system  of 
Marx  implies),  according  to  the  productive  effort  made;  or, 
whether  it  would  not  be  better  to  reward  each  person  accord- 
ing to  the  ultimate  outcome  of  his  productive  activity,  meas- 
ured by  the  product  itself.  In  other  words:  Shall  labor 
itself,  or  the  product  of  labor,  be  the  ultimate  standard  of 
distributive  justice  ? 

Nor  is  this  all.  Even  admitting  the  ethical  superiority  of 
the  rule  that  measures  the  recompense  by  the  trouble  of  pro- 
duction, there  remains  the  question  whether  this  rule  could 
be  applied  practically.  It  would  manifestly  be  impossible  to 
carry  out  such  a  rule  as  this  if,  as  we  have  attempted  to  prove 
(pages  52  ff.),  and  as  the  majority  of  modern  economists  con- 
tend, the  value  of  all  things  is  determined  at  least  in  part  by 
desire  or  utility,  and  does  not  necessarily  have  any  direct 
connection  with  the  labor  involved  in  their  production.  If 
our  theory  be  true,  value  cannot  possibly  be  determined  by 
any  such  rigid  rule  as  that  proposed  by  Marxism.  We  may, 
to  be  sure,  give  to  each  member  of  society,  in  exchange  for 
his  labor,  a  number  of  "  certificates  "  or  "  tickets  "  equal  to 
his  hours  of  labor.  But  it  would  be  impossible  to  guarantee 
that  in  exchange  for  these  certificates  he  will  be  able  at  any 
time  to  obtain  goods  representing  an  equal  period  of  equal 

1  The  school  of  Marx  refuses  to  discuss  this  ethical  problem  and  expressly 
eliminates  all  moral  considerations  from  its  argument.  But  the  ethical  prob- 
lem nevertheless  exists  and  demands  solution. 


MARX'S    MEASURE    OF    VALUE 


477 


labor  ;  for  no  conceivable  power  can  prevent  a  rare  com- 
modity from  being  worth  more  than  one  which  is  abundant, 
although  both  may  cost  the  same  number  of  hours  of  labor. 

Suppose,  furthermore,  that  this  formula  were  adopted  as  the 
law  of  distribution.  Is  there  not  reason  to  fear  that  its 
practical  application  would  have  unfortunate  effects  on  the 
productivity  of  society,  and  that  it  would  put  a  premium  on 
laziness  ?  For  experience  shows  that  the  man  who  devotes 
most  time  to  a  given  task  is  generally  not  the  good,  but  the 
poor  workman. 

Marx  answers  this  objection  by  declaring  that  he  does  not 
propose  to  count  the  time  spent  by  a  particular  workman  on 
a  particular  product,  but  to  find  out  how  many  hours  are 
usually  necessary  under  given  social  conditions  to  produce 
the  commodity  in  question.  Value  is  measured,  says  Marx, 
by  "  socially  necessary  hours  of  labor,"  that  is  to  say,  "  by 
the  period  of  labor  required  to  produce  any  exchange  value 
under  present  normal  social  conditions  of  production,  and 
with  the  average  degree  of  dexterity  and  intensity  of  labor." 
This  period  is  calculated  on  the  basis  of  statistical  data. 
Given,  for  example,  the  number  of  bushels  of  wheat  produced 
annually  in  the  United  States  ;  given  the  number  of  laborers 
engaged  in  its  production  ;  and  given  the  number  of  hours 
these  laborers  worked  ;  it  will  not  be  difficult,  says  the 
Marxist,  to  determine  how  many  hours  and  minutes  of  labor 
are  on  the  average  necessary  to  produce  a  bushel  of  wheat.1 

1  The  economists  who  explain  value  by  the  subjective  theory  of  final  or 
marginal  utility  have  no  difficulty  whatever  in  demolishing  Marx's  theory  of 
value,  inasmuch  as  they  deny  absolutely  the  possibility  of  discovering  any 
objective  standard  or  common  measure  of  value.  The  theory  offered  by  Marx 
is  in  fact  (as  we  have  already  hinted  on  page  59,  note  1)  a  development  of 
the  classical  labor  theory  of  value.  It  is  therefore  interesting  to  note  what 
an  eminent  economist  of  the  modern  classical  school  has  to  say  with  regard 
to  Marx's  theory  : — 

"The  hours  of  labor  suggested  by  Marx  as  a  common  measure  of  value," 
says  Professor  Paul  Leroy-Beaulieu,  "  and  applied  to  all  kinds  of  labor,  is 
simply  an  ideal  entity  which  corresponds  to  nothing  real  or  tangible.  Marx's 
idea  that  labor  is  the  measure  of  value  because  it  is  the  cause  of  value  is  en- 


478  PRINCIPLES   OF  POLITICAL  ECONOMY 

We  object  that  this  calculation  is  not  an  easy  matter.  But 
let  us  suppose  that  it  is.  Under  the  proposed  system  no 
one  would  have  any  interest  in  producing  more  than  the 
average  amount  of  wheat.  The  ideal  of  justice,  moreover, 
which  this  formula  seemed  to  approach,  on  closer  examina- 
tion is  grossly  violated.  When  we  speak  of  the  effort  or 
trouble  or  labor  of  production,  and  of  the  motives  and  in- 
tentions that  prompt  the  worker,  we  should  consider  individual 
labor,  not  social  labor.  Justice  demands  the  adaptation  of 
recompense  to  the  deserts  of  each  separate  person  ;  it  has 
nothing  to  do  with  social  averages.1 

V.  Cooperation 

In  its  etymological  sense  the  word  cooperation  simply 
means  "  working  together  " ;  but  it  is  now  employed  in  a 
more  definite,  specific  sense  by  those  who  regard  it  not 
merely  as  a  means  of  attaining  certain  aims  or  of  accom- 
plishing certain  social  improvements,  but  as  a  complete 
scheme  of  social  reconstruction.  This  scheme  is  not  exactly 
socialistic,  because  it  would  retain  private  property,  together 
with  its  principal  attributes.2  Yet  it  is  socialistic  in  the 

tirely  incorrect.  Value  has  no  other  cause  than  the  intensity  of  the  desire 
for  an  object  and  the  difficulty  of  its  acquisition  ;  this  is  in  turn  usually  regu- 
lated, in  the  case  of  a  very  large  number  of  objects,  by  the  cost  of  production. 
But  the  cost  of  production  does  not  consist  simply  of  the  '  time  of  labor '  (to 
employ  Marx's  expression)  ;  it  includes  very  diverse  elements,  many  of  which 
cannot  be  reduced  to  quantitative  expressions  of  labor.  The  intellectual  and 
material  labors  of  man  are  so  varied,  moreover,  are  of  such  diverse  impor- 
tance both  from  the  point  of  view  of  their  actual  result  in  the  shape  of  con- 
crete products  and  of  their  proper  remuneration,  that  it  is  impossible  to  re- 
duce them  to  a  single  common  basis." 

1  Many  efforts  have  been  made  (by  William  Thompson,  Owen,  Rodbertus, 
and  especially  by  George  Renard  in  his  book  on  "  Le  Regime  Socialiste  ")  to 
discover  some  simple,  easy  plan  for  distributing  wealth  proportionately  to 
labor.    But  there  is  no  simple,  self-operating  device  conceivable  other  than 
the  law  of  supply  and  demand. 

2  In  recent  years,  however,  a  certain  number  of  collectivists,  and  even 
some  anarchists,  have  advocated  cooperation,  without  abandoning  their  plan 
to  socialize  property.      They  regard  cooperation  as  a  preparatory  stage, 


MODERN  COOPERATION  479 

sense  that  it  proposes  a  social  ideal  entirely  different  from 
that  of  the  individualistic  and  capitalistic  system,  and  seeks 
to  realize  several  of  the  most  important  desiderata  of  social- 
ism. It  does  not,  however,  postpone  social  betterment  until 
society  has  been  revolutionized,  but,  meanwhile,  secures  a 
real  and  immediate  improvement  in  the  conditions  of  human 
existence. 

In  the  beginning  of  the  nineteenth  century,  Robert  Owen 
(in  England)  and  Fourier  (in  France)  considered  that  man 
and  the  world  might  be  completely  transformed  by  means  of 
voluntary  association  or  cooperation.  To  accomplish  this, 
they  invented  more  or  less  ingenious  schemes  which  proved 
unsuccessful.  But  the  necessities  of  hard,  practical  life, 
more  potent  than  theories  of  reform,  have  given  rise  simul- 
taneously in  several  countries  to  widely  different  varieties 
of  association.  In  England  there  are  consumers'  coopera- 
tive societies  ; 1  in  France,  cooperative  societies  for  produc- 
tion ;  in  Germany,  credit  associations  ;  in  Denmark,  rural 
cooperative  societies  ;  in  the  United  States,  building  associ- 
ations, mutual  benefit  societies,  etc.  These  associations 
have,  to  an  extent  that  is  still  quite  limited,  already  begun 
to  make  important  changes  in  prevailing  economic  condi- 
tions, and  to  open  the  way  for  the  realization  of  great  hopes. 

simply  as  a  step  toward  their  ultimate  goal.  For  cooperators  generally,  the 
cooperative  commonwealth  is  an  end  and  aim  in  itself ;  they  are  not  blind  to 
the  deficiencies  of  cooperation,  but  they  believe  that  it  is  the  basic,  essential 
principle  of  the  coming  society. 

1  We  have  throughout  this  book  used  the  term  "consumers'  cooperative 
societies  "  when  speaking  of  such  cooperative  institutions  as  those  which  pre- 
vail in  England.  These  are  not  examples  of  cooperative  consumption,  but 
of  cooperative  distribution,  in  the  customary  sense  of  the  term.  The  mem- 
bers do  not  consume  goods  together,  but  together  engage  in  their  sale,  i.e. 
their  distribution. 

The  term  "consumers'  association"  must  not,  moreover,  be  confounded 
with  "consumers'  leagues,"  such  as  have  been  founded  throughout  the 
United  States,  especially  in  cities.  These  leagues  consist  of  large  numbers 
of  consumers  who  discourage  the  purchase  of  any  article  made  in  unsanitary 
buildings  or  the  makers  and  sellers  of  which  are  inadequately  paid. 


480  PRINCIPLES   OF   POLITICAL  ECONOMY 

We  cannot  here  investigate  each  kind  of  cooperative  associa- 
tion in  detail,  and  must  refer  the  reader  to  those  sections  of 
the  book  under  which  the  different  varieties  of  cooperation 
are  discussed.1  We  shall,  however,  point  out  some  of  the 
features  which  characterize  all  kinds  of  cooperation,  —  fea- 
tures which  really  constitute  a  programme  of  social  reform :  — 

(1)  All   cooperative   organizations   aim    at    the    economic 
emancipation  of  certain  classes  of  society  in  prder  that  they 
may  do  away  with  unnecessary  intermediaries  or  middlemen 
and  learn  to  suffice  unto  themselves.     Consumers'  societies 
help  consumers  to  get  along  without  butchers,  bakers,  and 
other   retail   shopkeepers,   by   enabling    them    to    purchase 
goods  directly  from  the  producers,  or,  better  still,  by  them- 
selves producing  whatever  they  need.     Credit  associations 
enable  borrowers  to  escape  the  clutches  of  usurious  money- 
lenders, by  obtaining  for  them  directly  the  capital  which 
they  need,  or  even  by  helping  them  to  create  this  capital  for 
themselves   by  means  of   ingenious   schemes  for  collective 
saving    and    mutual    assistance.       Productive    associations 
enable  workers  to  dispense  with  employers,  by  making  com- 
modities under  their  own  guidance  and  selling  them  directly 
to  the  public. 

(2)  They  all  aim  at  the  substitution  of  solidarity  for  com- 
petition, and  of  the  cooperative  motto,  "  Each  for  All,"  for 
the     individualistic     device,     "Everybody    for     Himself." 
Instead  of  competing  with  each  other,  men  form  associations 
to  provide  for  the  satisfaction  of  their  wants  ;    and  these 
associations  make  it  a  rule  not  to  compete  with  each  other  ; 
but,  on  the  contrary,  to  unite  in  the  formation  of  great  coop- 
erative federations. 

(3)  They  all  aim  not  to  abolish  private  property,  but  to 
make  it  more  general  by  facilitating  the  acquisition  of  pri- 

1  For  cooperative  consumers'  societies,  see  the  sections  on  Consumption  ; 
for  building  associations,  see  the  section  on  Some  Special  Forms  of  Credit ; 
for  productive  cooperation,  see  the  chapter  on  Profit ;  for  cooperative  credit 
associations,  see  the  chapter  on  Credit. 


AIMS   OF   COOPERATION  481 

vate  capital  either  by  saving  or  borrowing,  and  to  create 
corporative  property  or  collective  ownership  of  stores,  banks, 
workshops,  factories,  and  houses.1 

(4)  They  all  aim,  not  to  suppress  capital,  but  to  deprive 
it  of  its  controlling  influence  in  production,  and  to  withhold 
that  part  of  the  product  which  capital  appropriates  in  the 
form  of  profits  and  dividends.  The  abolition  of  profit  in  all 
its  forms  was  the  essential  feature  of  Owen's  reform  scheme. 
Many  cooperative  associations  are  expressly  forbidden  by 
their  constitutions  to  make  any  profits,  or  are  obliged  to  pay 
them  into  a  reserve  fund.  Other  associations  distribute 
profits  among  their  members  in  proportion  to  their  pur- 
chases (when  the  members  are  "  purchasing  "  members),  or 
in  proportion  to  their  labor  (when  they  are  employees),  but 
never  in  proportion  to  their  shares,  i.e.  to  the  capital  they 
furnish.  Those  who  contribute  shares  of  capital  and  those 
who  make  loans  of  capital  always  do  so  simply  for  a  moderate 
interest,  never  in  consideration  of  dividends.  Some  socie- 
ties pay  no  interest  at  all  on  their  capital.  When  we  note 
that  in  joint  stock  companies  and  corporations,  which  are 

1  The  number  of  cooperative  societies  in  England  (1901)  is  1648.  The 
statistics  for  1604  of  these  societies  showed  a  total  membership  of  1,919,555 
persons;  shares  amounting  to  £24,595,706;  annual  sales  amounting  to  £81,- 
782,949  ;  annual  profits,  £9,099,412  ;  investments,  £15,577,863. 

German  cooperative  credit  associations,  according  to  the  latest  report  pub- 
lished (for  1901)  had  funds  amounting  to  about  $330,000,000,  i.e.  $55,000,000 
in  shares  or  reserves,  and  $275,000,000  in  outstanding  loans. 

On  July  1,  1902,  there  were  1641  consumers'  cooperative  societies  in 
France.  Six  hundred  and  sixty-three  of  these  societies  reported  a  total 
membership  of  160,438.  There  were  also  323  productive  cooperative  socie- 
ties in  France,  principally  in  the  building  trades. 

The  Danish  Farmers'  Cooperative  Association  includes  1056  cooperative 
dairies,  which  in  1901  produced  butter  to  the  value  of  $37,500,000,  and  ex- 
ported 7,350,000  eggs. 

Even  Japan  has  486  cooperative  associations. 

It  is  practically  impossible  to  get  any  reliable  figures  with  regard  to  the 
present  status  of  cooperation  in  the  United  States.  The  student  would  do 
well  to  consult  the  cooperative  newspapers  with  regard  to  the  movement  in 
this  country,  — especially  the  American  Cooperator,  published  at  Lewiston, 
Maine. 


482  PRINCIPLES   OF   POLITICAL   ECONOMY 

now  increasing  so  rapidly  in  wealth  and  numbers,  capital 
appropriates  the  proceeds  of  the  enterprise,  conducts  pro- 
duction, and  reduces  all  the  workers  to  the  rank  of  hired 
employees,  we  are  better  able  to  understand  that  the  system 
of  cooperation  really  means  nothing  less  than  a  social  revo- 
lution, inasmuch  as  it  reverses  the  present  situation,  and 
places  capital  under  the  command  and  control  of  labor. 

(5)  Lastly,  all  cooperative  associations  possess  great  educa- 
tional value  because  they  teach  their  members  to  sacrifice  no 
part  of  their  individuality  or  their  spirit  of  enterprise,  but, 
on  the  contrary,  to  develop  their  energy  and  ability  to  the 
utmost  degree,  to  help  others  by  helping  themselves,  to  regard 
the  satisfaction  of  legitimate  wants  (not  the  pursuit  of  prof- 
its) as  the  purpose  of  economic  activity,  to  raise  the  moral 
level  of  economic  relations  by  suppressing  advertisements, 
trickery,  food  adulteration,  the  sweating  system,  etc.,  and  to 
abolish  all  the  methods  by  which  men  exploit  each  other,  as 
well  as  all  the  causes  of  social  conflict.  Indeed,  it  may  be 
said  that  each  important  variety  of  cooperative  association  is 
characterized  by  the  abolition  of  some  social  conflict,  of  some 
clash  of  economic  interests :  the  consumers'  association  sup- 
presses the  conflict  between  seller  and  buyer ;  the  credit 
association  suppresses  the  conflict  between  creditor  and  debtor; 
the  productive  association  suppresses  the  conflict  between 
employer  and  employee.1 

Can  these  associations  carry  out  so  ambitious  a  programme 
as  this  ?  As  the  oldest  of  them  has  been  in  existence  less 
than  sixty  years,  it  would  be  difficult  to  give  an  unqualified 
answer.  M.  Claudio  Jannet,  however,  who  was  certainly  not 
a  cooperator,  felt  justified  in  declaring  that  cooperation  is 
"  the  only  social  experiment  of  the  nineteenth  century  that 

1  There  are  other  forms  of  association  which  also  aim  at  the  suppression 
of  economic  antagonisms.  Trades  unions,  for  example,  and  combinations  of 
employers,  endeavor  to  suppress  competition  among  workers  in  the  same 
trade  or  employers  in  the  same  business.  But  in  these  cases  the  conflict  is 
due  to  a  rivalry  of  similar  interests,  while  cooperative  associations  attenuate 
the  conflicts  due  to  divergent,  opposite  interests. 


AIMS   OF   COOPERATION  483 

has  been  successful."  Cooperative  societies  of  production, 
on  which  early  French  socialism  founded  such  great  hopes  of 
social  regeneration,  have,  in  some  instances,  achieved  glorious 
success,  but  these  instances  have  thus  far  been  few  in  num- 
ber. But  cooperative  credit  associations,  and  especially  con- 
sumers' associations,  have  developed  most  remarkably,  and 
are  still  growing  with  a  rapidity  that  amazes  their  adversaries 
and  even  their  advocates.  Consumers'  associations  now  aim 
at  the  absorption  of  all  other  forms  of  cooperative  organiza- 
tion, and  thus  to  establish,  as  it  were,  a  cooperative  common- 
wealth in  which  the  complete  control  of  production  shall  be 
placed  in  the  hands  of  the  consumers  themselves.  Certainly 
the  accomplishment  of  this  object  would  be  an  economic 
transformation  of  no  mean  significance.1 

1  Professor  Paul  Leroy-Beaulieu,  in  his  large  "  Economic  Politique,"  gives 
the  objections  that  are  raised  against  cooperation  as  a  principle  of  social 
regeneration.  Consult  also  Gide's  volume  on  "La  Cooperation." 


PAET  II.     THE  VARIOUS  KINDS   OF  INCOME 

WE  have  considered  the  general  principles  of  the  distribu- 
tion of  wealth.  We  must  still  make  a  more  detailed  exami- 
nation of  the  share  which  each  of  us  receives  as  income,  and 
discover  the  origin  and  causes  of  each  kind  of  income. 

If  we  were  living  under  a  system  of  isolated  production, 
each  person  producing  upon  his  own  land  and  with  the  aid 
of  his  own  implements,  such  a  study  as  we  are  about  to  make 
would  be  unnecessary.  Each  of  these  autonomous  producers 
would  keep  for  himself  the  entire  product  of  his  labor ;  no 
one  could  rightfully  dispute  his  claim  to  it,  and  there  would 
be  absolutely  no  need  for  discussion. 

But  we  know  that  this  supposition  is  far  from  true,  unless 
it  be  in  very  small  industries.  To-day,  the  principal  agent 
of  production,  called  the  entrepreneur,1  or  projector,  usually 
furnishes  only  a  small  share  of  the  elements  indispensable  to 
production ;  he  is  obliged  to  borrow  from  others  part  or  all 
of  these  elements  :  labor,  land,  and  capital.  Therefore  he  can- 
not retain  all  the  product  for  himself,  but  must  first  pay  his 
collaborators  for  their  assistance,  and  the  share  which  each 
of  them  receives  constitutes  his  income.  To  the  laborer  he 
will  give  wages,  to  the  capitalist  interest,  and  to  the  land- 
owner rent;  and  the  remainder  the  entrepreneur  will  keep 
for  himself,  provided  there  is  anything  left.  This  remainder 
constitutes  his  own  income,  and  is  a  distinct  variety  of  income 
called  profits.2 

1  The  French  term  entrepreneur,  literally  meaning  undertaker  (the  person 
at  the  head  of  any  undertaking),  has  now  acquired  current  usage  in  English. 

Adam  Smith  and  the  old  English  economists  did  not  distinguish  the 
entrepreneur  from  the  capitalist.  J.  B.  Say  first  pointed  out  the  distinction, 
although  the  word  was  used  by  Quesnay. 

2  Instead  of  giving  his  co-partners  their  share  after  the  value  of  the  prod- 

484 


THE   SHARERS   IN    DISTRIBUTION  485 

For  this  reason  logic  would  seem  to  require  that  we  begin 
this  review  of  the  various  categories  of  income  by  taking  up 
profits,  since  the  entrepreneur  has  charge  of  distribution,  and 
all  the  other  kinds  of  income  must  pass,  so  to  speak,  through 
his  hands.  This,  however,  is  by  no  means  the  case.  As  we 
have  just  said,  profit  is  that  part  of  the  value  of  the  product 
which  is  left  after  the  shares  of  the  other  participants  have 
been  withdrawn.  Hence  it  is  most  convenient  to  begin  with 
the  study  of  the  three  other  kinds  of  income. 

The  threefold  division  of  distribution  possesses  the  advan- 
tage of  corresponding  very  closely  to  the  three  branches  of 
production.  Each  of  the  three  factors  which  unite  in  the 
work  of  production  has  its  distinct  share  in  the  product. 
This  seems  so  perfectly  natural  that  the  classical  economists 
paid  no  attention  whatever  to  the  justification  of  these  various 
kinds  of  income.  Their  existence  and  the  necessity  for  them 
seemed  perfectly  self-evident. 

The  economic  mechanism  which  we  have  described,  how- 
ever, in  which  the  entrepreneur  plays  a  very  important  part, 
possesses  an  artificial  or  at  least  accidental  character;  it  is 
simply  one  phase  of  economic  evolution.  If  we  recall  the 
limitations  pointed  out  in  connection  with  the  threefold  divi- 
sion of  production  (see  page  69);  if  we  remember,  moreover, 
that  labor,  or  rather  man,  is  the  true  agent  of  production, 
and  land  and  capital  only  instruments  in  his  control,  the 

uct  has  been  realized,  the  entrepreneur  may  do  this  in  advance.  This  is 
precisely  the  custom  with  regard  to  wages  and  rent ;  but  it  makes  no  differ- 
ence in  the  nature  of  distribution. 

It  is,  moreover,  possible  and  even  customary  for  the  entrepreneur  to  pro- 
vide some  of  the  productive  elements.  He  may  furnish  all  or  part  of  the 
capital.  Generally  he  provides  a  certain  amount  of  labor.  But  this  matters 
little  from  the  theoretical  point  of  view,  for  in  this  event  the  entrepreneur 
simply  combines  other  functions  with  those  that  naturally  devolve  upon  him, 
and  the  total  income  which  he  receives  will  consist  of  several  theoretically 
distinct  elements.  Even  though  he  provided  all  the  necessary  elements  for 
production,  and  produced  goods  independently  of  the  help  of  others,  his 
income  may  theoretically  be  divided  into  the  four  component  parts  here 
pointed  out. 


486  PRINCIPLES    OF   POLITICAL   ECONOMY 

serene  confidence  of  classical  economists  in  the  reasonableness 
and  justice  of  this  symmetrical  division  is  somewhat  shaken, 
and  it  would  appear  both  natural  and  jnst  that  the  laborer 
should  receive  the  entire  product.  Land  and  capital  being 
both  inert  things,  they  cannot  pretend  to  claim  for  themselves 
any  share  in  the  product.  It  would  seem  that  to  speak  of 
their  rights  or  their  claims,  and  to  regard  them  as  sharers  in 
the  proceeds  of  productive  activity,  must  be  purely  meta- 
phorical. Only  persons  can  have  rights  or  claims.  It  is  of 
course  understood  that  land  itself  or  capital  itself  makes  no 
claim  to  a  share,  but  the  landowners  and  capitalists  who 
represent  them.  But  is  it  not,  at  the  very  least,  necessary 
for  these  persons  to  state  why,  and  by  virtue  of  what  right, 
they  are  authorized  to  speak  in  the  name  of  the  land  or  of 
capital  ? 


CHAPTER   I —  WAGES 
I.   Definition  of  Wages 

WAGES,  as  generally  defined  by  economists,  mean  the 
income  received  by  a  person  in  exchange  for  his  labor. 

If  we  adhere  to  this  definition,  wages  must  be  regarded  as 
the  natural  income  par  excellence,  —  as  the  income  that  has 
always  existed  and  always  will  exist.  We  cannot  conceive 
a  social  state  in  which  a  man  could  live  otherwise  than  by 
exchanging  his  labor,  or  the  products  of  his  labor,  or  his 
services,  for  a  certain  amount  of  wealth.  The  classical  econ- 
omists have  consequently  declared  that  all  men  live  by  labor; 
or,  as  Mirabeau  put  it,  "  all  men  are  wage-workers,  except 
thieves  and  beggars."  The  classical  economists  regard  even 
landowners  and  persons  living  on  independent  incomes  as 
belonging  to  the  category  of  workers. 

But  in  our  opinion  this  definition  is  not  correct;  it  is  prob- 
ably inspired  by  a  perhaps  unconscious  desire  to  regard  wages 
as  the  most  natural  and  perfect  kind  of  remuneration,  and  to 
accept  the  wage  system  as  a  permanent  and  necessary  insti- 
tution. 

Now  it  should  be  the  province  of  science  to  discriminate, 
and  to  distinguish  the  various  kinds  of  "  labor  "  and  the  in- 
comes arising  therefrom,  rather  than  to  confound  them.  The 
word  "  wages,"  in  the  language  of  economics  as  well  as  in 
that  of  everyday  speech,  should  be  applied  not  to  every  kind 
of  remuneration  for  labor,  but  only  to  the  remuneration  for 
a  particular  kind  of  labor  ;  that  is,  for  labor  performed 
under  certain  clearly  defined  conditions.  It  should,  in  a 
word,  be  defined  as  the  price  of  labor  hired  and  employed  by 
an  entrepreneur.'1 

1  Indeed,  in  everyday  speech,  wages  means  the  pay  of  the  laborer,  that  is 
to  say,  of  the  man  who  works  ior  an  employer.  The  other  kinds  of  rernu- 

487 


488  PRINCIPLES    OF    POLITICAL    ECONOMY 

\Ve  have  repeatedly  had  occasion  to  note  that  the  employ- 
ment of  laborers  by  the  entrepreneur  constitutes  the  striking 
feature  of  modern  economic  organization.  It  is,  in  fact, 
inseparable  from  the  present  economic  organization  of  society. 
The  wage  system  and  the  industrial  leadership  of  the  entre- 
preneur or  employer  are,  so  to  speak,  two  aspects  of  the  same 
social  institution.  Labor  now  being  a  commodity  that  is 
offered  for  sale  on  the  market  may  be  called  merchandise. 
The  worker  is  the  seller ;  the  entrepreneur  is  the  purchaser ; 
and  the  price  is  called  wages. 

It  is  therefore  obvious  that  the  payment  of  wages  is  a 
method  of  remuneration  of  comparatively  recent  develop- 
ment in  the  economic  history  of  mankind, — a  method  which 
has  been  made  general  by  the  capitalistic  constitution  of 
present  society  and  the  use  of  labor  hired  by  employers. 
It  is  not  impossible,  moreover,  that  the  wage  system  may 
disappear  with  the  disappearance  of  the  present  economic 
system.  This  will  be  made  plainer  in  the  next  section. 

II.    History  of  the  Wage  System 

At  all  times,  even  under  the  slave  system  of  antiquity, 
there  were  poor  freemen  who  hired  their  labor  to  the  rich 
members  of  the  community  in  exchange  for  money  or  for 
goods ;  these  men  may  perhaps  be  regarded  as  wage-workers. 
But  this  kind  of  labor  was  entirely  exceptional.  There  could 
be  little  use  for  men  of  this  class  in  that  long  period  of  eco- 
nomic evolution  to  which  we  have  given  the  name  of  "  family 
economy"  (page  132),  —  the  period  in  which  the  labor  of 

neration  for  labor  have  different  names.  The  income  of  professional  men 
consists  of  fees,  retainers,  honoraries,  etc.  That  of  officials  is  called  their 
salary.  Although  these  persons  live  also  by  their  personal  labor,  they  do 
not  sell  their  labor  to  an  employer  or  entrepreneur,  but  to  their  patients, 
clients,  etc.,  or  to  a  political  community.  The  economic  laws  which  deter- 
mine the  remuneration  received  by  these  persons  are  entirely  different  from 
those  which  regulate  the  wages  of  employees.  We  cannot,  however,  enter 
into  the  problem  of  the  determination  of  all  these  incomes,  but  must  confine 
ourselves  to  the  most  important  of  all,  i.e.  wages. 


KISE   OF   THE    WORKING    CLASSES  489 

slaves  or  serfs  was  sufficient  to  produce  all  that  was  needed 
by  the  household.  These  free  laborers  were  more  like 
modern  independent  workers  "  in  business  for  themselves," 
i.e.  autonomous  producers  living  by  their  trade.  They  were 
occasionally  hired  to  help  out  in  cases  where  the  slaves  or 
permanent  servants  were  not  sufficient.1 

Nor  could  there  be  a  large  class  of  genuine  wage-workers 
under  the  second  economic  system  discussed  above  (page  133), 
—  that  of  guild  industry.  The  "journeymen"  were  doubt- 
less paid  by  the  master  of  the  shop,  but  their  relation  to  him 
was  not  that  of  wage-worker  to  employer.  The  journeyman 
and  the  master  were  bound  together  not  only  by  social  fellow- 
ship and  close  association,  but  by  reciprocal  legal  duties. 
Journeymen  could  not  be  discharged  at  the  pleasure  of  the 
master,  nor  could  they,  of  their  own  choice,  cease  working 
for  the  master.  Their  wages  and  their  labor  were  regulated 
by  the  statutes  of  the  guild.  All  of  them,  moreover,  hoped 
some  day  to  become  masters  themselves,  and  for  most  of 
them  this  hope  was  ultimately  fulfilled. 

In  brief,  under  this  system  the  workers  and  the  masters 
did  not  constitute  two  opposing  social  classes,  but  simply  con- 
stituted two  successive  stages  in  a  man's  industrial  career. 

But  toward  the  end  of  the  Middle  Ages  the  small  town 
markets  about  which  the  guilds  had  grouped  ceased  to  be  the 
centre  of  economic  life.  The  great  states  of  Europe  began 
to  assume  definite  shape  and  to  constitute  economic  organ- 
isms. New  roads  and  routes  were  opened  and  gave  rise  to 
national  and  even  international  markets.  The  mediaeval 
masters  were  unable  to  produce  on  a  sufficiently  large  scale 
for  these  enlarged  markets.  Their  place  was  gradually  taken 
by  capitalists  and  wealthy  merchants  who  subsequently  be- 
came industrial  leaders.  Thus  the  modern  "employer"  of 

1  Sometimes  a  master  would  lend  his  slaves  to  other  persons  for  a  fixed 
price,  which  might  perhaps  be  called  wages  ;  but  this  payment  was  entirely 
different  from  wages  as  they  exist  to-day,  because  the  master  received  it,  and 
not  the  slaves  themselves. 


490  PRINCIPLES    OF    POLITICAL   ECONOMY 

labor  was  evolved  at  the  same  time  that  the  "  journeymen  " 
found  it  impossible  to  become  "  masters."  Gradually  a  body 
of  men  came  into  existence  who  were  unable  to  look  forward 
as  a  matter  of  course  to  a  time  when  they  should  themselves 
be  master-craftsmen.  They  began  to  form  a  distinct  work- 
ing-class in  a  more  modern  sense  of  the  term.  Shut  out 
from  the  guilds  of  the  masters,  they  formed  guilds  of  their 
own,  consisting  exclusively  of  journeymen.  These  were 
really  the  first  trades  unions.  From  that  time  onward,  capi- 
talists and  laborers  are  separated,  and  the  history  of  labor 
ceases  to  be  the  history  of  capital.1 

Still  another  step  was  required  for  the  evolution  of  a  class 
of  wage-workers  such  as  exists  to-day.  It  was  necessary  to 
suppress  all  the  rules  and  regulations  which  caused  the 
economic  inferiority  of  the  guild  system,  and  which  were 
a  hindrance  as  well  as  a  protection  to  the  workman.  It 
was  necessary  to  remove  the  restrictions  which  had  previ- 
ously hedged  about  the  manual  laborer  on  all  sides,  and 
by  virtue  of  the  right  of  private  property  and  free  contract 
to  allow  the  laborer  to  do  with  his  labor  what  he  pleased. 
It  was  at  this  time  that  manufactures  were  created  or  fos- 
tered by  the  government,  entirely  outside  the  scope  of  guild 
influence  ;  they  employed  considerable  numbers  of  these 
free  laborers,  and  were  enabled  to  apply  an  elaborate  division 
of  labor  and  large-scale  methods  of  production.  Ultimately, 
most  European  governments  did  away  altogether  with  guild 
regulations  and  decreed  the  entire  liberty  of  labor  to  engage 
in  any  occupation  at  any  time  or  any  place,  under  conditions 
agreed  upon  by  employer  and  employee  according  to  free 
contract. 

This  last  step  made  the  workers  free  :  free  to  sell  their 

1  Consult :  Ashley,  "  An  Introduction  to  English  Economic  History  and 
Theory  "  ;  Seebohm,  "  The  English  Village  Community  "  ;  Cunningham  and 
McArthur,  "  Outlines  of  English  Industrial  History  "  ;  Gomme,  "  The  Vil- 
lage Community  "  ;  Cheyney,  "  Industrial  and  Social  History  of  England  "  ; 
Gross,  "The  Gild  Merchant." 


THE   SYSTEM    OF    FREE    CONTRACT  491 

labor  at  a  price  determined  in  the  open  market  by  the  law  of 
demand  and  supply  ;  free  to  refuse  employment  or  to  stop 
work  when  it  pleased  them  to  do  so.  And  of  course  the 
employer  was  also  free,  under  the  same  conditions,  to  pay 
them  the  minimum  price  for  which  labor  could  be  obtained  ; 
free  to  hire  men,  women,  or  children,  and  to  discharge  them 
at  his  pleasure.  The  contract  of  hire  was  made  as  free  as  a 
contract  of  sale,  —  much  more  simple,  in  fact,  inasmuch  as  the 
law  made  no  provisions  concerning  it,  —  and  human  labor 
became  a  commodity  the  value  of  which  is  fixed  by  the  same 
laws  as  govern  the  value  of  any  other  merchandise.  All  this 
accomplished,  the  modern  wage  system  was  the  result. 

No  one,  not  even  a  socialist,  would  think  of  denying  that 
this  economic  regime  has  given  a  remarkable  impetus  to  pro- 
duction, or  that  it  accounts  largely  for  the  present  industrial 
status  of  civilized  nations.  Nor  would,  on  the  other  hand, 
any  fair-minded  person  deny  that  industrial  liberty  was  at 
first  much  more  profitable  to  the  employers  than  to  the  em- 
ployees. The  latter  were  isolated,  unorganized,  the  victims 
of  laws  which  forbade  them  to  unite  and  which  therefore 
placed  them  under  conditions  most  unfavorable  to  the  sale 
of  the  only  commodity  they  possessed  ;  this  commodity,  — 
their  labor, — they  were  obliged  to  sell  for  a  mere  pittance. 
It  is  generally  recognized,  moreover,  that  from  the  end  of  the 
eighteenth  to  the  middle  of  the  nineteenth  century  the  con- 
dition of  hired  laborers  (especially  in  Europe)  was  very 
unfortunate,  and  that  the  wage  system  was  even  less  advan- 
tageous to  them  than  preceding  industrial  systems. 

But  during  the  past  thirty  years  many  improvements  have 
been  effected  in  the  condition  of  employed  labor,  for  these 
reasons  :  — 

(1)  Because  employees  have  learned  to  unite  and  form 
organizations  for  the  better  defence  of  their  interests;  and 
because  the  prohibitive  laws  which  placed  obstacles  in  the 
way  of  exercising  the  perfectly  legitimate  right  to  organize 
have  been  abolished. 


492  PRINCIPLES    OF    POLITICAL   ECONOMY 

(2)  Because  in  many  countries  so-called  "  labor  laws  "  or 
"  factory  laws,"  which  we  shall  summarize  later,  have  been 
passed  in  the  interest  of  the  working  classes  to  provide 
humane  safeguards  such  as  existed  under  the  guild  system, 
but  which  were  subsequently  done  away  with.  These  laws 
regulate  the  hours  of  work  ;  insure  laborers  against  accident, 
sickness,  old  age,  etc.;  and  secure  hygienic  conditions  of 
employment.  Although  they  have  not  attempted  to  fix  the 
rate  of  wages,  they  have  usually  established  certain  rules 
with  regard  to  the  method  of  payment  and  the  discharge  of 
employees. 

III.   The  Laws  of  Wages 

Laws  of  wages  should  formulate  the  general  principles 
which  determine  the  rate  of  payment  for  hired  labor  and 
should  indicate  the  causes  of  its  rise  or  fall.  The  problem 
of  wages  is  one  of  the  greatest  in  political  economy,  and  has 
given  rise  to  a  multitude  of  celebrated  theories.  Before 
taking  up  this  problem,  however,  two  distinctions  require  to 
be  drawn  very  clearly,  viz.  that  between  real  and  nominal 
wages,  and  that  between  the  real  and  nominal  cost  of  labor. 

We  often  speak  of  wages  as  the  "laborer's  share  of  the 
product."  This,  however,  is  not  entirely  accurate.  The  wages 
of  the  weaver,  for  instance,  do  not  consist  of  a  certain  num- 
ber of  yards  of  the  cloth  which  he  has  helped  to  weave.  The 
wages  of  labor,  at  least  in  modern  civilized  societies,  are 
almost  always  paid  in  money;  and  in  many  countries  the 
law  prescribes  that  wages  must  be  so  paid.1  They  represent 
a  certain  share  of  the  value  of  the  product.  But  as  the  con- 
tract of  hire  is  made  before  work  is  undertaken,  wages  are 
agreed  on  before  the  product  is  sold.  The  employer,  more- 

1  Payment  in  commodities  —  supplied  usually  by  stores  kept  by  the 
employers  —  is  called  the  truck  system.  This  system  was  at  one  time  quite 
prevalent  in  England  and  in  this  countiy,  where  workers  were  obliged  to 
take  out  a  certain  part  of  their  wages  in  purchases  at  the  stores.  It  has 
often  been  made  a  device  for  robbing  the  laborers. 


REAL  WAGES  493 

over,  is  obliged  by  law  to  pay  the  stipulated  wages,  whether 
the  product  prove  salable  or  unsalable,  of  little  or  of  great 
value.  Wages,  therefore,  are  advanced  by  capitalists  in 
anticipation  of  a  future  return. 

If  the  laborer  received  his  remuneration  in  cloth  or  in 
whatever  other  commodity  he  had  produced,  he  would  have 
to  sell  it  in  order  to  buy  food  and  fuel  and  to  pay  the  rent 
of  his  house.  This,  to  say  the  least,  would  be  a  difficult 
matter ;  the  worker  prefers  to  have  money,  because  of  its 
advantages  under  the  present  system  of  division  of  labor 
and  exchange.  The  payment  of  money  for  labor,  however, 
must  not  blind  us  to  the  fact  that  what  the  laborer  really 
works  for  is  not  money,  but  bread,  clothes,  fuel,  and  all 
the  other  things  he  wants.  These  are  his  real  wages  ;  pro- 
vided he  gets  more  of  them,  it  does  not  matter  whether 
he  gets  more  or  less  money.  If  food  or  clothing  or  fuel  or 
rent  become  dearer,  the  wages  of  every  workman  are  really 
lessened.  On  the  other  hand,  everything  which  makes  goods 
cheaper  increases  the  real  wages  of  the  workman,  because  he 
can  get  more  goods  in  exchange  for  the  same  money  wages. 

We  may  therefore,  with  Francis  Walker,  define  real  wages 
as  "  the  remuneration  of  the  laborer  reckoned  in  the  neces- 
saries, comforts,  and  luxuries  of  life."  Walker  points  out 
that  wages  may  apparently  be  the  same,  and  yet  differ  widely 
by  reason  of  the  following  circumstances  :  — 

(#)  Variations  in  the  purchasing  power  of  money. 

(6)  The  form  of  payment,  as  when  the  board  of  the 
laborer,  the  rent  of  a  cottage,  the  privilege  of  grazing  a  cow, 
allowances  of  certain  quantities  %of  food,  drink,  or  fuel,  the 
right  to  take  flour  at  miller's  prices,  one  or  more  of  these,  are 
added  to  the  money  wages  of  the  laborer. 

((?)  The  greater  opportunities  in  some  avocations  than  in 
others  for  extra  earnings  by  the  laborer  himself  or  by  the 
members  of  his  family. 

(d)  The  greater  regularity  of  employment  in  some  avoca- 
tions than  others. 


494  PBINCIPLES   OF  POLITICAL  ECONOMY 

(  e)  The  longer  duration  of  the  capacity  to  labor  in  some 
avocations  and  some  countries,  than  in  others.1 

From  the  standpoint  of  the  laborer,  therefore,  real  wages, 
not  nominal  or  money  wages,  are  of  most  importance.  This, 
however,  is  not  the  sole  aspect  of  the  wage  problem.  From 
the  standpoint  of  the  employer  wages  may  be  high,  —  not 
only  nominally  but  really,  —  and  yet  labor  may  be  cheap. 
When  we  speak  of  cheap  labor,  we  refer  usually  to  labor  that 
is  poorly  paid.  But  this  is  not  strictly  correct.  "  The  cost 
of  labor  is  high  or  low,  according  as  the  employer  gets  an 
ample  or  a  scanty  return  for  the  wages  he  pays  the  laborer, 
whether  these  be  low  or  high."  If  a  bootmaker  receives  $2 
a  day  and  makes  $  7  worth  of  boots,  his  labor  costs  less  than 
that  of  the  bootmaker  who  is  paid  only  $1  a  day  and  makes 
only  |3  worth  of  boots.2 

Differences  in  the  productivity  of  laborers  in  the  same 
trade  and  locality  are  often  so  great  that  wages  are  not  paid 
according  to  the  time  of  work,  but  according  to  the  quantity 

1  Mortality  differs  greatly  according  to  occupation.     The  insurance  com- 
panies recognize  this  by  refusing  to  insure  persons  engaged  in  certain  extra- 
hazardous  occupations.     In  a  calculation  based  on  a  comparison  between 
the  census  returns  in  England  for  1881  and  the  death  registers  for  the  three 
years  1881,  1882,  and  1883,  and  relating  only  to  males  between  25  and  65 
years  of  age,  Dr.  Ogle  found  the  lowest  death  rate  to  be  among  clergymen. 
Taking  this  class  as  a  basis  (represented  by  the  figure  100),  the  comparative 
mortality  among  lawyers  was  152  ;  medical  men,  202  ;  farmers,  114 ;  brew- 
ers, 245 ;    innkeepers  and   liquor    dealers,   274 ;   file-makers,   300 ;   Cornish 
miners,  331 ;  earthenware  makers,  314. 

Dr.  Edward  Jarvis  has  shown  that,  on  the  average,  an  Irishman  who  has 
reached  the  age  of  20  has  28.88  years  to  live  ;  a  Frenchman,  32.84  ;  an 
Englishman,  35.55  ;  a  Norwegian,  39.61. 

"It  is  evident,"  says  Francis  Walker,  "that  if  two  persons  begin  to 
labor  productively  at  the  same  period  of  life  and  continue  at  work  until 
death,  at  the  same  nominal  rate  of  wages,  that  one  receives  the  higher  real 
remuneration  who  lives  the  longer,  inasmuch  as  the  cost  of  his  maintenance 
during  the  first  unproductive  years  of  life,  must,  in  any  philosophical  view 
of  the  subject,  be  charged  upon  his  wages  during  his  period  of  labor." 

2  "  The  labor  on  a  ton  of  steel  billets  and  rails  in  the  United  States  (1901) 
costs  less  than  in  Great  Britain,  though  American  wages  are  higher.     The 
labor  cost  of  a  certain  grade  of  shoes  in  a  Massachusetts  factory,  where 


THE   PRICE   OF   LABOR  495 

of  work  that  is  done.  Such  remuneration  is  called  piece 
wages  as  distinguished  from  time  wages. 

In  view  of  the  numerous  factors  of  the  problem  of  wages, 
we  may  well  ask  whether  there  are  in  fact  any  natural  laws 
which  regulate  the  rate  of  wages.  Is  not  the  quest  of  such 
laws  futile,  inasmuch  as  wages  vary  from  trade  to  trade, 
from  time  to  time,  from  place  to  place,  and  in  each  particu- 
lar case  are  determined  by  the  outcome  of  bargaining  be- 
tween employer  and  employee  ? 

To  reason  thus,  however,  would  be  erroneous.  The  price 
of  other  things  also  varies  according  to  time,  place,  and 
the  nature  of  the  commodity;  it  also  may  be  said  to  be  the 
result  of  bargaining  between  buyers  and  sellers.  Yet  these 
circumstances  do  not  preclude  the  existence  of  laws  govern- 
ing prices.  There  is  no  incompatibility  between  this  appar- 
ent variability  and  the  existence  of  scientific  laws.  Prices 
and  wages  are,  to  be  sure,  regulated  by  agreements  between 
men,  but  these  agreements  are  themselves  determined  by 
general  causes  which  it  is  our  task  to  discover.  A  well- 
founded  belief  in  the  existence  of  natural  laws  in  political 
economy  must  lead  us  to  hold  that  when  men  make  contracts 
they  are  influenced  by  certain  motives  or  by  certain  exterior 
circumstances  which  are  present  in  all  cases  and  which  can 
be  disentangled  from  the  confused  mass  of  particular  cases.1 

wages  are  high,  is  only  40  cents  a  pair,  but  in  Germany,  where  wages  are 
low,  the  cost  is  58  cents  a  pair.  Such  results  are  due  to  highly  trained  labor 
and  the  best  labor-saving  machinery  and  skill  in  its  use,  which  greatly  reduce 
the  cost  of  products,  though  the  price  of  labor  may  be  high.  Thus  the 
United  States,  with  high-priced  labor,  is  able  to  sell  many  of  its  manufactures 
in  foreign  markets  in  competition  with  countries  in  which  the  price  of  labor 
is  low."  —  C.  C.  ADAMS,  "  A  Text-book  of  Commercial  Geography,"  1901. 

1  It  is,  moreover,  quite  as  inaccurate  to  say  of  wages  as  of  prices,  that 
they  are  fixed  by  individual  contract.  Just  as  there  is  a  general  market 
price  that  is  but  little  influenced  by  individual  higgling,  so  there  is  also  a 
general  rate  of  wages  for  each  kind  of  labor,  — a  rate  which  is  quite  as  bind- 
ing on  employers  as  on  employees. 

It  would  seem,  however,  that  there  must  be  not  one,  but  as  many  different 
rates  of  wages  as  there  are  occupations.  There  can,  in  fact,  be  no  doubt  about 


496  PRINCIPLES   OF   POLITICAL   ECONOMY 

It  is  not  the  province  of  a  scientific  law  to  explain  each  par- 
ticular case  in  all  its  details,  but  to  formulate  those  general 
and  permanent  tendencies  which  are  present  everywhere, 
although  they  may  be  partially  overcome  or  disguised  by 
local,  temporary,  or  accidental  circumstances.  No  one  would 
think  of  abandoning  the  law  of  gravitation  as  scientifically 
worthless,  simply  because  flowers  grow  upward  and  balloons 
rise  in  the  air  in  apparent  violation  of  it. 

As,  in  the  present  economic  organization  of  society,  labor 
is  simply  a  commodity  that  is  bought  and  sold  on  the  mar- 
ket,1 it  is  evident  that  the  price  of  manual  labor  must  be 
determined  by  the  same  laws  as  those  which  govern  the 
price  of  any  merchandise.  These  laws  we  have  studied  in 
connection  with  value,  and  summarized  in  the  popular  doctrine 
of  demand  and  supply.  Cobdeii  condensed  this  doctrine,  as 
applied  to  labor,  into  the  classic  and  picturesque  formula  : 
"  Whenever  two  workmen  run  after  one  master,  wages  fall ; 
whenever  two  masters  run  after  one  workman,  wages  rise." 

But  the  formula  of  demand  and  supply,  applied  to  prob- 
lems of  distribution,  lacks  scientific  precision  and  complete- 
ness. Many  economists  have  abandoned  it  as  a  law  of 

the  inequality  of  wages.  But  these  inequalities  can  generally  be  explained 
by  the  unequal  risks  and  advantages  or  disadvantages  of  particular  trades, 
the  unequal  duration  of  apprenticeship,  the  unequal  productivity  of  labor, 
its  constancy  or  inconstancy,  etc.  This  topic  is  the  subject  of  interesting 
pages  by  Adam  Smith  and  Professor  Alfred  Marshall.  (See  the  latter's 
"Principles  of  Economics.")  If  we  could  estimate  the  exact  importance  of 
each  of  these  elements  and  eliminate  the  factors  which  obscure  the  funda- 
mental problem,  we  should  find  that  the  rate  of  wages  is  theoretically  the 
same  in  all  trades.  Under  a  hypothetical  system  of  free  competition 
(and  assuming  equal  abilities,  equally  long  apprenticeships,  etc.)  all  trades 
would  be  equally  remunerative ;  for  if  they  were  not,  workers  would 
abandon  the  trades  that  pay  less  and  take  up  those  that  pay  more,  and  thus 
the  natural  equilibrium  would  be  reestablished.  But  as  this  system  of  free 
competition  is  purely  hypothetical,  and  particularly  so  with  regard  to  labor, 
there  are  in  reality  wide  divergencies  in  wages.  When,  therefore,  we  speak 
of  the  "current  rate  of  wages  "  we  mean  the  wages  of  common,  unskilled  labor. 
1  There  are,  however,  several  differences  between  labor  and  other  commod- 
ities: (1)  The  worker  sells  his  work,  but  he  himself  remains  his  own 


THE   WAGES   FUND   THEORY  497 

wages,  and  endeavored  to  discover  a  more  accurate  and 
satisfactory  formula. 

Three  important  wage  theories  (or  groups  of  theories) 
have  been  suggested,  each  of  which  has  attained  considera- 
ble celebrity,  and  each  of  which  has  its  advocates  at  the 
present  time. 

§  1.  THE  WAGES  FUND  THEORY.  For  a  long  time  this 
was  the  classical  English  theory  of  wages.  It  has  played  an 
important  part  in  the  history  of  economic  doctrines,  and 
approaches  most  closely  to  the  popular  theory  of  demand 
and  supply,  of  which,  in  fact,  it  is  merely  a  more  precise 
statement. 

The  supply,  according  to  this  theory,  consists  of  the 
laborers  who  are  in  quest  of  work  and  who  offer  their  ser- 
vices in  order  to  earn  a  living.  The  demand,  on  the  other 
hand,  consists  of  the  capital  which  seeks  investment.  We 
have  learned  that  the  only  way  to  employ  capital  produc- 
tively is  to  supply  work  of  some  sort  for  laborers.  The 
ratio  between  this  capital  and  the  number  of  laborers 
determines  the  rate  of  wages. 

Take  the  circulating  capital  of  a  country,  which  English 
economists  call  the  wages  fund  because  in  their  opinion  its 
purpose  is  to  support  the  laborers  while  they  are  employed 

property.  When  we  say  that  labor  is  a  commodity,  it  does  not  follow  that 
the  laborer  himself  is  a  commodity ;  the  product  and  the  producer  are  differ- 
ent. (2)  When  a  person  sells  his  services,  he  has  to  present  himself  where 
they  are  delivered.  As  Marshall  declares,  "  It  matters  nothing  to  the  seller 
of  bricks  whether  they  are  to  be  used  in  building  a  palace  or  a  sewer  ;  but  it 
matters  a  great  deal  to  the  seller  of  labor  whether  or  not  the  place  in  which 
it  is  to  be  done  is  a  wholesome  and  a  pleasant  one,  and  whether  or  not  his 
associates  are  such  as  he  cares  to  have."  (3)  Labor  is  perishable.  The 
laborer  must  find  employment  at  once.  His  energy  cannot  be  stored  up.  He 
must,  moreover,  sell  it  in  order  to  live,  and  he  cannot  withhold  it  long  from 
the  market.  (4)  Concerted  action  is  more  difficult  among  the  sellers  of 
labor  than  among  those  that  buy  it ;  the  latter  may  take  advantage  of  their 
stronger  position  and  purchase  labor  at  less  than  its  normal  value.  (5)  The 
supply  of  labor  cannot  quickly  be  adjusted  to  the  demand  for  it.  A  long 
time  is  required  to  prepare  and  train  labor  for  its  work,  and  the  returns 
which  result  from  this  training  are  realized  much  later. 


498  PRINCIPLES   OF   POLITICAL  ECONOMY 

productively.  Then  take  the  number  of  laborers.  Divide 
the  former  quantity  by  the  latter,  and  the  quotient  is  the 
average  rate  of  wages.  If,  for  example,  the  total  circulating 
capital  is  two  billion  dollars,  and  the  number  of  laborers  is 
ten  million,  the  annual  average  wages  will  be  just  $200. 

It  is  evident  that  according  to  this  theory  wages  can  vary 
only  as  one  or  the  other  of  these  two  factors  varies.  A  rise 
in  wages,  therefore,  is  possible  only  in  the  two  following 
cases :  — 

(#)  If  the  wages  fund,  i.e.  the  aggregate  amount  to  be 
distributed  as  wages,  is  increased ;  and  the  only  way  in 
which  this  can  be  done  is  by  saving. 

(5)  If  the  laboring  population,  i.e.  the  divisor  in  this 
simple  problem  of  division,  is  diminished.  This  can  be 
done  only  by  having  laborers  apply  the  principles  ex- 
pounded by  Malthus,  either  by  abstaining  from  marriage 
or  by  having  few  children. 

As  John  Stuart  Mill  expressed  it :  "  Wages  depend  on  the 
proportion  between  the  number  of  the  laboring  population, 
and  the  capital  or  other  funds  devoted  to  the  purchase  of 
labor.  ...  If  wages  are  higher  at  one  time  or  place  than 
at  another,  if  the  subsistence  and  comfort  of  the  class  of 
hired  laborers  are  more  ample,  it  -is  for  no  other  reason  than 
because  capital  bears  a  greater  proportion  to  population.  It 
is  not  the  absolute  amount  of  accumulation  or  of  production, 
that  is  of  importance  to  the  laboring  class  ;  it  is  not  the 
amount  even  of  the  funds  destined  for  distribution  among 
the  laborers  :  it  is  the  proportion  between  those  funds  and 
the  number  among  whom  they  are  shared."  "Wages  not 
only  depend  upon  the  relative  amount  of  capital  and  (labor- 
ing) population,  but  cannot,  under  the  rule  of  competition, 
be  affected  by  anything  else." 

Certainly  this  theory  is  not  encouraging  for  the  future  of 
the  working  classes.  It  is  to  be  feared  that  the  divisor  (the 
number  of  laborers)  will  increase  far  more  rapidly  than  the 
dividend  (the  amount  of  available  capital);  whence  it  fol- 


OBJECTIONS   TO   WAGES   FUND   THEORY  499 

lows  that  the  quotient  (wages)  must  tend  to  diminish  until 
a  point  is  reached  below  which  it  cannot  descend.  The 
obvious  reason  for  this  is  that  it  is  a  much  easier  matter  to 
increase  the  number  of  children  than  to  increase  the  supply 
of  capital;  the  latter  implies  abstinence,  and  the  former 
implies  the  reverse.  Population  increases  spontaneously; 
but  not  capital. 

Although  the  wages  fund  theory  is  still  held  by  a  number 
of  economists,  it  is  generally  discredited. 

In  the  first  place,  the  thought  on  which  it  is  founded,  viz. 
that  a  certain,  definite  amount  of  circulating  capital  is  neces- 
sary for  employing  laborers,  is  of  interest  only  with  regard 
to  production,  not  with  regard  to  distribution.  To  know 
whether  an  entrepreneur  has  the  means  to  set  laborers  to 
work,  that  is  to  say,  whether  he  has  sufficient  raw  materials, 
equipment,  etc.,  is  one  thing ;  to  know  what  share  of  the 
proceeds  of  the  enterprise  he  will  be  able  to  yield  to  his 
employees,  is  quite  another  thing.  The  first  of  these  matters 
depends  on  what  he  possesses ;  the  second  depends  on  what 
he  produces.  The  demand  for  labor  depends  on  the  state  of 
industrial  activity  ;  but  this  activity  depends  in  turn  on  the 
anticipations  and  plans  of  entrepreneurs  much  more  than  on 
the  amount  of  capital  that  they  possess. 

The  apparent  exactitude  of  this  theory,  moreover,  is 
illusory.  When  we  examine  it  more  closely,  it  amounts  to 
saying  that  the  average  rate  of  wages  may  be  ascertained  by 
dividing  the  total  amount  paid  out  as  wages,  by  the  number 
of  wage-earners.  This  is  simple  tautology.  Or,  if  we  attach 
a  more  sensible  interpretation  to  the  theory,  it  means  that 
wages  are  higher  in  a  country  that  possesses  a  relatively 
large  supply  of  capital  than  in  one  which  does  not ;  but  this 
is  too  self-evident  a  proposition  to  require  any  proof. 

We  must  inquire,  finally,  whence  comes  this  circulating 
capital,  this  wages  fund?  Obviously,  from  labor  itself. 
Professor  J.  B.  Clark  has  suggestively  compared  the  relation 
between  labor  and  capital  to  the  operation  of  a  pump  :  "  Let 


500  PRINCIPLES   OF   POLITICAL   ECONOMY 

a  man  pump  water  into  a  full  tank,  and  get  what  he  wants 
for  use  from  the  overflow  :  does  the  water  for  consumption 
come  from  the  tank  or  from  the  pump  ?  In  a  sense  from 
both ;  and  if  important  interests  were  dependent  on  the 
answer  given,  there  would  be  here  an  opportunity  for  a  fierce 
logomachy  like  that  which  has  actually  arisen  over  the  origin 
of  wages.  The  particular  drops  which  are  used  come  imme- 
diately from  the  tank  ;  but  the  amount  in  it  is  undiminished, 
and  the  draught  virtually  comes  from  the  supply  furnished 
by  the  pump.  Moreover,  the  size  of  the  tank  has  no  influ- 
ence on  the  amount  of  the  overflow  ;  that  is  gauged  by  the 
volume  of  the  inflowing  stream.  In  like  manner,  wages  are 
taken  immediately  from  a  reservoir  of  capital ;  but  the 
amount  in  the  reservoir  is  undiminished,  since  the  quantity 
which  was  drawn  from  it  has  already  been  added  to  it  by  the 
stream  of  products  resulting  from  industry.  It  is  the  volume 
of  products  which  sets  limits  to  the  amount  of  wages."1 

Probably  the  most  destructive  criticism  of  the  wages  fund 
theory  was  that  presented  by  Thornton,  whose  celebrated 
book  "On  Labour"  led  John  Stuart  Mill,  who  had  most 
skilfully  elaborated  the  wages  fund  theory,  to  abandon  it. 
Thornton  maintains  "  that  laborers,  by  combining,  may  exer- 
cise a  monopoly  influence  and  so  raise  the  rate  of  wages  "  ; 
and  if  this  be  true,  then  there  can  be  no  fixed  wages  fund, 
the  exact  amount  of  which  must  be  expended  in  wages.  If 
there  be  a  national  fund,  the  whole  of  which  must  necessarily 
be  applied  to  the  payment  of  wages,  this  fund  "  can  only  be 
an  aggregate  of  smaller  funds  of  the  same  kind  possessed  by 
the  several  individuals  composing  the  nation.  But  is  there 
any  specific  portion  of  any  individual's  capital  which  the 
owner  must  necessarily  expend  upon  labor?  .  .  .  Does 
any  farmer  or  manufacturer  ever  say  to  himself,  '  I  can  afford 
to  pay  so  much  for  labor;  therefore,  for  the  labor  I  hire, 
whatever  the  quantity  be,  I  will  pay  so  much  ? '  Does  he 
not  rather  say,  4  So  much  labor  I  require ;  so  much  is  the 
1  J.  B.  Clark,  "Philosophy  of  Wealth,"  page  127. 


THE   IRON    LAW    OF    WAGES  501 

utmost  I  can  pay  for  it,  but  I  will  see  for  how  much  less  than 
the  utmost  I  can  afford  to  pay  I  can  get  all  the  labor  I 
require  ? '" 1 

§  2.  THE  IKON  LAW  OF  WAGES.  This  theory  also  starts 
from  the  fact  that  manual  labor,  or  the  power  to  work  is, 
under  present  social  conditions,  a  commodity  that  is  bought 
and  sold  on  the  market.  Workmen  are  the  sellers.  Em- 
ployers are  the  purchasers.  But  wherever  there  is  free  com- 
petition, is  not  the  value  of  all  commodities  determined  by 
the  cost  of  production  ?  This  cost  regulates  what  economists 
call  the  natural  price  or  normal  value  of  goods.  The  same 
law  must  hold  for  the  commodity  called  manual  labor ; 
the  price  of  labor  (wages)  must  also  be  fixed  by  the  cost  of 
production. 

Lassalle,  who  made  much  of  this  theory  of  the  cost  of  pro- 
duction of  labor,  and  who  called  it  the  "iron  law  of  wages" 
because  of  its  supposed  absolute  and  rigid  validity,  declares 
that  the  price  of  labor,  "  like  the  price  of  all  other  merchan- 
dise, is  determined  by  the  relation  of  supply  and  demand. 
But  what  determines  the  market  price  of  any  merchandise 
or  the  average  ratio  of  supply  and  demand?  The  necessary 
cost  of  production."  2 

We  must  now  learn  the  meaning  of  the  words  "cost  of 
production  "  as  applied  to  the  person  of  the  laborer.  Take 
a  steam  engine  for  illustration.  The  cost  of  producing  with 
the  engine  includes  :  (#)  the  value  of  the  fuel  consumed  ; 
(5)  the  sum  that  each  year  must  be  devoted  to  keeping  it 
in  good  repair  and  ultimately  replacing  it  when  it  becomes 
unfit  for  further  use.  In  very  much  the  same  way,  the  cost 
of  production  of  labor  includes  :  (&)  the  value  of  the  goods 
which  the  workman  must  consume  to  support  himself  and 
maintain  his  productive  powers  ;  (5)  the  amount  necessary 
to  replace  this  workman  by  another  when  he  becomes  unfit 

1  See  Macfarlane,  "  Value  and  Distribution,"  Philadelphia,  1899,  Book 
IV;  also  Francis  Walker,  "Political  Economy,"  Part  VI,  Section  V. 

2  Lassalle,  "  Herr  Bastiat-Schulze-Delitzsch,"  Chapter  4. 


502  PRINCIPLES    OF    POLITICAL   ECONOMY 

for  work,  i.e.  the  amount  necessary  for  raising  the  number 
of  children  required  by  society. 

Thus  wages  are  necessarily  determined  by  the  minimum 
that  is  absolutely  necessary  for  the  support  of  the  laborer 
and  his  family.  Putting  this  law  in  more  general  terms, 
wages  cannot  long  remain  above  or  below  the  amount  neces- 
sary for  the  maintenance  (subsistence  and  propagation)  of 
the  laboring  class. 

For  thirty  years  this  theory  has  been  repeated  again  and 
again  by  socialistic  agitators,  like  the  refrain  of  a  war-song, 
and  has  served  excellently  as  a  means  of  intensifying  class 
hatred  and  fostering  dislike  of  the  present  economic  system 
with  which  it  is  supposed  to  be  inseparably  connected.  It 
was  used  to  convince  the  laboring  classes  that  the  present 
economic  organization  offers  them  no  hope  of  the  permanent 
improvement  of  their  hard  lot.  But  although  the  theory 
received  its  characteristic  name  from  the  collectivists,  and 
although  it  owes  its  wide  acceptance  largely  to  them,  it  was 
first  advanced  by  classical  economists.  Turgot  was  the  first 
to  declare  that  "in  every  kind  of  labor  the  workman's 
wages  must  fall  to  a  level  determined  solely  by  the  necessities 
of  existence."  J.  B.  Say  and  Ricardo  used  almost  the  same 
words,  and  have  since  been  roundly  criticised  for  unwittingly 
laying  the  foundations  for  socialism. 

To-day,  the  theory  is  abandoned.  The  liberal  school,  not- 
ing what  dangerous  conclusions  might  be  drawn  from  this 
doctrine,  disclaimed  it  most  energetically ;  and  the  collectiv- 
ists themselves,  particularly  Liebknecht,  formally  disavowed 
it  at  the  Congress  of  Halle  in  1890.1 

If  we  take  this  theory  literally,  as  meaning  that  the  work- 
man's wages  can  never  rise  above  what  he  absolutely  requires 

1  Collectivists,  nevertheless,  continue  to  assert  that  wages  are  reduced  to  a 
minimum.  But  the  reason  which  they  give  for  this  statement  is  a  different 
and  more  valid  one.  They  maintain  that  the  permanent  existence  of  a  large 
number  of  laborers  out  of  work,  who  are  willing  to  sell  their  services  for  any 
price  whatever,  affects  the  market  for  labor  and  prevents  any  permanent  rise 
in  wages.  They  call  the  unemployed  "the  reserve  army  of  labor," — an 


CRITIQUE   OF    THE   IRON    LAW   OF    WAGES  503 

to  live  on,  it  is  much  too  pessimistic  and  is  manifestly  con- 
trary to  facts.  The  purely  material  wants  of  life  are,  on  the 
whole,  of  relatively  little  consequence.  Irish  and  French 
peasants  find  it  possible  to  live  on  next  to  nothing.  If,  then, 
the  indispensable  minimum  for  the  bare  support  of  life  con- 
stituted an  "  iron  law  of  wages,"  innumerable  commonplace 
facts  would  be  inexplicable.  Why  is  the  rate  of  wages 
not  the  same  in  all  trades  ?  Must  an  engraver  or  a  skilled 
mechanic  consume  more  food-stuffs,  more  nitrogen  and 
carbon,  than  a  stone-breaker  or  a  street-cleaner  ?  Why, 
moreover,  are  wages  higher  in  the  United  States  than  in 
France,  Germany,  or  England  ?  Is  there  any  physiological 
reason  why  an  American  should  eat  more  than  an  English- 
man, —  despite  the  fact  both  of  them  belong  to  the  same 
race  ?  Why  are  wages  higher  to-day  than  a  century  ago,  — 
a  fact  which  is  beyond  all  question  ?  Have  we  greater 
appetites  than  our  forefathers  ?  Again,  why  are  the  wages 
of  farm  laborers  lower  in  winter,  when  they  are  obliged  to 
spend  more  for  heating  and  clothing,  than  in  summer,  when 
food  is  so  cheap  and  life  in  the  country  is  so  easy  that  Victor 
Hugo  calls  this  the  "  poor  man's  season  "  ? 

But  this  law  is  sometimes  interpreted  in  a  broader  sense. 
It  is  sometimes  taken  to  mean,  not  the  minimum  amount 
of  carbon  and  nitrogen  necessary  to  keep  body  and  soul 
together,  but  the  minimum  amount  needed  to  satisfy  the 
complex  wants  of  man  living  in  civilized  society;  this,  of 
course,  is  a  quantity  that  varies  according  to  the  stage  of 
civilization  which  a  society  has  reached.  The  law  is  some- 
times taken  to  mean  that  the  wages  of  labor  are  governed 
by  the  habits  and  customs  (the  standard  of  living)  of  the 
working  class  to  which  a  man  belongs,  and  by  the  sum  total 
of  wants  (physical  and  social,  natural  and  artificial)  which 
characterize  the  people  among  which  he  lives.  If  we  are 

army  which  helps  the  employers,  not  the  laborers,  by  necessarily  reducing 
wages  to  the  lowest  competitive  basis.  This  theory  really  brings  us  back  to 
the  law  of  supply  and  demand. 


504  PRINCIPLES    OF   POLITICAL   ECONOMY 

agreed  that  this  standard  of  living,  instead  of  being  an  "  iron 
law  "  is  in  reality  elastic,  changeable,  fluctuating  according 
to  race,  climate,  and  period ;  and  if,  moreover,  we  are  ready 
to  admit  that  the  standard  of  living  necessarily  and  steadily 
tends  to  rise  with  every  increase  in  the  number  of  wants, 
desires,  and  exigencies  of  civilized  men;  then  the  above 
formula  is  indeed  applicable,  but  almost  too  optimistic,  and 
promises  more  than  we  have  any  sound  reason  to  hope  for. 
In  this  interpretation  we  should  speak,  not  of  the  "  iron  " 
law,  but  of  the  "golden"  law  of  wages. 

Ask  the  disciples  of  Lassalle  why  the  wages  of  French 
day  laborers  in  rural  districts  were  formerly  so  low  that  they 
lived  on  cheap  brown  bread  and  wore  clogs,  whereas  now 
their  wages  permit  them  to  eat  better  food  and  wear  shoes ; 
and  they  will  reply  that  these  wages  have  increased  precisely 
because  the  laborers  have  adopted  new  wants  and  a  higher 
standard  of  living.  Let  us  grant  this  for  the  sake  of  argu- 
ment. If,  now,  the  laborers  should  adopt  the  habit  of  eating 
meat  every  day  in  the  week  and  of  wearing  flannel  shirts 
under  their  coarse  coats,  are  we  to  take  it  for  granted  that 
their  wages  will  rise  enough  to  enable  them  to  satisfy  these 
new  wants  also  ?  If  so,  who  could  be  more  fortunate  than 
they  ?  For  in  such  a  case  the  wages  of  the  worker  would 
not  determine  his  manner  of  living;  but,  on  the  contrary, 
his  manner  of  living  would  determine  his  wages. 

This  roseate  conception  of  the  law  of  wages  has  been  pre- 
sented by  an  American  economist,  Mr.  George  Gunton,  in  a 
book  entitled  "  Wealth  and  Progress."  Mr.  Gunton  argues 
that  wages  depend  upon  what  the  workingman  considers  the 
lowest  level  on  which  he  can  live.  In  this  theory,  competi- 
tion can  reduce  wages  to  the  lowest  limits  he  will  work  for, 
but  not  lower,  because  he  will  then  starve  rather  than  work, 
or  organize  a  strike  that  will  force  up  wages.  A  Chinaman 
receives  low  wages  because  he  will  live  on  a  very  low  stand- 
ard. Economical  living  necessarily  means  scant  wages,  and 
a  high  standard  of  living  means  high  wages.  One  way  of 


THE   PRODUCTIVITY   THEORIES  505 

developing  the  workman's  wants  is  by  shortening  his  hours 
of  labor,  thus  increasing  his  social  and  educational  opportu- 
nities, and  so  raising  his  standard  of  living.  For  this  reason 
Mr.  Gunton  is  a  warm  advocate  of  the  movement  which  aims 
to  shorten  the  work-day. 

In  reply  to  this  theory,  it  is  objected  that  laborers  will 
lower  their  standard  of  living  rather  than  starve,  especially 
when  there  is  an  abundant  supply  of  labor  ready  to  take  the 
place  of  those  that  insist  on  the  higher  standard.  Machin- 
ery, moreover,  is  constantly  discharging  men  whose  particu- 
lar skill  was  necessary  formerly,  but  whose  work  can  now  be 
accomplished  by  cheap  labor, — even  by  the  labor  of  women 
and  children.  In  some  skilled  trades  intelligent  workmen, 
by  means  of  labor  organizations,  may  maintain  a  high  stand- 
ard of  wages  and  of  living.  But  unskilled  laborers  cannot 
do  anything  of  the  sort.  The  principal  argument  against 
this  theory  consists,  as  we  have  indicated,  in  the  fact  that  it 
mistakes  cause  for  effect.  Wages  are  not  high  because  the 
standard  of  living  is  high,  but  vice  versa.  A  man  does  not 
improve  his  standard  of  living  in  order  to  raise  his  wages ; 
but  he  tries  to  get  better  wages  in  order  that  he  may  improve 
his  standard.  To  get  better  wages,  he  must  increase  his 
productivity,  that  is  to  say,  his  usefulness  to  those  that 
employ  him.  When  he  has  accomplished  this,  he  may  expect 
to  receive  higher  wages  and  raise  his  standard  of  living. 

§  3.  THE  THEORIES  OF  THE  PRODUCTIVITY  OF  LABOR. 
A  third  theory,  or  class  of  theories,  although  likewise  based  on 
the  application  of  the  laws  of  value  to  the  determination  of 
wages,  nevertheless  reaches  conclusions  entirely  different  from 
those  of  the  wages-fund  theory  and  the  iron  law  of  wages. 

According  to  this  theory  the  value  of  labor  cannot  be  com- 
pared to  that  of  any  ordinary  commodity  subject  solely  to 
the  law  of  demand  and  supply  under  free  competition.  The 
laborer  is  not  merely  a  commodity,  but  an  instrument  of  pro- 
duction; and  the  value  of  an  instrument  of  production  de- 
pends especially  on  its  productivity.  When  an  entrepreneur 


506  PRINCIPLES    OF    POLITICAL   ECONOMY 

rents  land,  is  not  the  price  which  he  pays  for  its  hire  esti- 
mated according  to  the  productivity  of  the  land?  Why, 
then,  when  he  hires  labor,  should  not  the  rate  of  wages  be 
proportionate  to  the  productivity  of  labor  ? 

Although  the  idea  that  the  productivity  of  labor  determines 
the  rate  of  wages  was  clearly  set  forth  by  Yon  Thuenen,  the 
most  striking  form  of  the  productivity  theory  is  that  given 
by  Francis  Walker  in  his  book  on  "The  Wages  Question," 
and  sometimes  designated  as  the  "  residual  claimant "  theory 
of  wages. 

Of  course  this  theory  does  not  maintain  that  wages  will  be 
equal  to  the  total  product  of  an  enterprise.  That  would  be 
impossible,  inasmuch  as  there  would  then  be  no  profit  for  the 
entrepreneur  and  he  could  not  continue  to  employ  laborers. 
But  it  does  maintain  that  the  workman  receives  as  wages 
all  that  remains  of  the  total  product  when  the  three  shares 
(interest,  rent,  and  profits)  belonging  to  the  other  produc- 
tive collaborators  have  been  deducted.  These  three  shares 
are  strictly  determined  in  their  respective  amounts,  whereas 
the  worker's  share  possesses  the  advantage  of  not  being  fixed.1 
In  his  relation  to  the  other  factors  of  production  the  wage- 
worker  may  be  compared  to  a  residual  claimant  or  legatee 
who  takes  what  is  left  when  the  other  heirs  have  received 
their  stated  shares  of  an  estate.2 

luThe  wages  of  a  workingman  are  ultimately  coincident  with  what  he 
produces,  after  the  deduction  of  rent,  taxes,  and  the  interest  of  capital." 
—  STANLEY  JEVONS. 

2  Walker's  theory  rose  out  of  his  protest  against  the  wages-fund  theory. 
Wages,  says  Walker,  are  not  dependent  on  capital  ;  because  men  without 
capital  can  and  do  often  employ  labor,  provided  that  they  can  know  that  the 
laborers  employed  will  produce  enough  value  to  enable  them  to  pay  the  labor- 
ers out  of  the  product  and  leave  a  balance  for  the  employer.  Farm  laborers 
sometimes  receive  merely  their  board  until  the  harvest  comes,  whereupon 
they  receive  the  rest  of  their  remuneration.  "The  employer  purchases  labor 
with  a  view  to  the  product  of  labor,  and  the  kind  and  amount  of  that  prod- 
uct determine  what  wages  he  can  afford  to  pay." 

There  are  laws  for  rent,  for  profits,  and  for  interest,  definitely  fixing  the 
amount  that  can  be  claimed  by  landlords,  employers,  and  capitalists. 


THE   KESIDUAL   CLAIMANT   THEORY  507 

This  theory,  if  sound,  would  be  quite  as  encouraging  as 
the  wages-fund  theory  and  the  iron  law  of  wages  were  dis- 
couraging. For  if  the  rate  of  wages  depends  solely  on  the 
productivity  of  the  workingman's  labor,  his  welfare  is  entirely 
in  his  own  hands.  The  more  he  produces,  the  more  he  will 
earn.  Everything  that  increases  his  productivity  —  physical 
development,  mental  superiority,  technical  training,  inven- 
tions, and  machinery  —  will  inevitably  increase  his  wages. 

Whereas  the  wages-fund  theory  was  too  rigidly  pessimis- 
tic, this  doctrine  is  probably  too  optimistic.  Yet  both 
theories  lead  to  similar  conclusions  with  regard  to  the  effec- 
tiveness of  combinations  among  laborers.  They  both  make 
it  appear  impossible  for  labor  organizations  to  improve  the 
condition  of  the  working  classes.  For  if  the  laborer  is  a 
residual  claimant,  it  must  be  true  of  him,  as  it  is  of  the  resid- 
ual legatee  of  an  estate,  that  he  is  powerless  to  increase  or 
decrease  his  share  in  distribution.  Walker,  moreover,  him- 
self makes  the  rather  important  qualification  that  the  laborers 
will  get  this  share,  "  unless  by  their  own  neglect  of  their 
interest,  or  through  inequitable  laws,  or  social  customs  hav- 
ing the  force  of  laws,"  any  one  of  the  other  three  parties 
carries  away  something  in  excess  of  his  normal  share. 
Walker  also  points  out  that  the  laborer  may  lose  his  advantage 
by  "  weak,  spasmodic,  or  unintelligent  competition  with  the 
employing  class."  We  may  well  ask,  therefore,  whether  it 
does  not  follow  that  the  laborer's  share  depends,  in  the  last 
resort,  not  so  much  upon  his  residual  claim  as  upon  his 
power  to  have  and  to  hold  ?  Does  not  the  statement  that  an 
increase  in  the  product  goes  to  the  laborer  "  by  purely 
natural  laws,  provided  only  competition  be  fall  and  free" 

"These  three  shares  being  cut  off  the  product  of  industry,  the  whole  remain- 
ing body  of  wealth,  daily  or  annually  created,  is  the  property  of  the  laboring 
classes,  their  wages,  or  the  remuneration  of  their  services.  So  far  as  by 
their  energy  in  work,  their  economy  in  the  use  of  materials,  or  their  care  in 
dealing  with  the  finished  product,  the  value  of  that  product  is  increased,  that 
increase  goes  to  them  by  purely  natural  laws,  provided  only  competition  be 
full  and  free." 


508  PRINCIPLES    OF    POLITICAL   ECONOMY 

contain  an  exceedingly  important  provision  that  is  but  rarely 
fulfilled  in  the  case  of  labor  ? 

In  the  light  of  this  theory  the  wages  contract  would  be 
even  more  advantageous  to  employees  than  partnership  or 
profit-sharing,  because  the  workman  alone  is  supposed  to 
receive  the  entire  increase  in  the  product;  the  other  collabo- 
rators in  the  productive  process  receive  only  fixed  shares 
which  tend,  relatively  speaking,  to  diminish. 

A  simple  enumeration  of  the  conclusions  to  which  this 
theory  leads  is  sufficient  to  show  how  little,  unfortunately,  it 
is  justified  by  facts.  We  are  ready  to  admit  that  the  pro- 
ductivity of  labor  influences  the  rate  of  wages  by  increasing 
the  general  wealth  of  a  country ;  that  by  thus  augmenting 
the  sum  total  of  wealth  for  distribution  it  must  ultimately 
increase  the  share  that  goes  to  each  productive  factor,  and 
must  therefore  help  to  increase  wages.  We  are  also  per- 
fectly willing  to  admit  that  the  productivity  of  labor 
exerts  a  differential  influence  on  the  rate  of  wages  ;  that  is  to 
say,  whenever  a  particular  laborer  or  a  particular  kind  of 
labor  is  more  productive  than  others,  more  wages  are  usually 
paid.  But  this  theory  leaves  in  the  background  one  of  the 
most  essential  factors  of  the  problem,  viz.  the  abundance  or 
scarcity  of  labor,  the  effect  of  which  is  oftentimes  prepon- 
derant. Consider,  for  illustration,  the  United  States.  The 
productivity  of  labor  in  this  country  has  increased  enormously 
during  the  past  twenty  years  ;  but  the  rate  of  wages,  although 
it  may  be  higher  now  than  then,  has  by  no  means  kept 
pace  with  the  increased  productivity  of  labor.  Why  not  ? 
Because  the  number  of  proletarians  in  this  country  has  been 
largely  increased  by  the  immigration  of  foreign  laborers, 
the  decreasing  supply  of  desirable  land,1  and  other  circum- 
stances tending  to  augment  the  supply  of  labor  more  rapidly 
than  the  demand.  These,  in  fact,  are  some  of  the  factors 
which  lead  trades  unions  to  try  to  control  the  supply  of  labor. 

1  "  Wherever  there  is  an  abundance  of  free  land,  hired  laborers  find  it  easier 
to  maintain  a  high  standard  of  living.  In  this  country  it  has  been  so  easy 


MARGINAL   PRODUCTIVITY    OF    LABOR  509 

There  appear  to  be  valid  reasons  for  abandoning  the  pro- 
ductivity theory  in  the  form  given  to  it  by  Walker.  But 
we  need  not  hesitate  to  admit  the  element  of  truth  con- 
tained in  the  "productivity"  idea.  An  attempt  has  been 
made  to  elaborate  this  idea  more  scientifically  by  the  econo- 
mists who  accept  the  doctrine  of  final  utility.  (See  pages 
54  ff.  and  189  ff.)  Indeed,  it  is  maintained  that  the  greatest 
importance  of  the  final  utility  doctrine  consists  precisely  in 
its  applicability  to  the  problems  of  distribution.  The  Ger- 
man economist  Von  Thuenen  was  not  only  the  first  to  de- 
velop this  doctrine  as  a  scientific  explanation  of  value,  but 
he  appears  also  to  have  been  the  first  writer  to  apply  it  to 
the  solution  of  the  problems  of  rent,  wages,  and  interest.1 

According  to  this  school  of  thinkers  the  rate  of  wages  is 
determined  by  the  marginal  productivity  of  labor.  There  is 
in  every  business  enterprise  a  point  beyond  which  it  will 
not  pay  the  entrepreneur  to  hire  more  laborers.  Additional 
laborers,  like  additional  increments  of  any  commodity, 
usually  possess  less  value,  less  utility,  than  the  preceding 
ones.  (See  the  section  on  the  Laws  of  Consumption.) 
Each  new  laborer  furnishes  a  decreasing  utility  to  the  em- 
ployer, until  a  point  is  reached  where  the  cost  of  an  addi- 
tional laborer  would  be  greater  than  the  value  resulting  from 

for  laborers  to  acquire  fertile  land  and  to  engage  in  farming  on  their  own 
account,  that  the  supply  of  hired  laborers  has  been  reduced  quickly  and 
easily  whenever  wages  have  fallen  below  the  income  that  could  be  secured 
from  agriculture.  In  the  future,  American  wages  will  be  less  affected  by 
this  influence."  —  BULLOCK,  "  Introduction  to  the  Study  of  Economics." 

1  The  translator  of  this  work  has  endeavored,  in  an  essay  entitled  "Thue- 
nen's  Wertlehre"  (Halle,  1896),  to  give  Von  Thuenen  his  proper  place  in 
the  history  of  economic  doctrines  by  proving  that  he  was  the  real  author  of 
the  theory  of  final  utility. 

In  the  second  part  of  his  remarkable,  albeit  fragmentary,  work,  "  Der  Iso- 
lirte  Staat"  (1850),  Thuenen  set  forth  theories  of  wages  and  interest.  He 
had  already  worked  out  a  theory  of  rent  in  the  first  part  of  his  book,  published 
in  1826,  before  having  cognizance  of  Ricardo's  theory.  Throughout  these 
theories  of  distribution  the  idea  of  marginal  utility  constituted  a  fundamental 
part  of  Thuenen's  argument. 


510 


PRINCIPLES   OF   POLITICAL   ECONOMY 


his  labor.  For  a  time,  to  be  sure,  the  value  of  the  product 
may  increase  more  rapidly  than  the  cost  of  labor ;  and  as 
long  as  this  is  true,  we  may  speak  of  a  "law  of  increasing 
returns."  But  sooner  or  later  the  point  must  be  reached  be- 
yond which  it  does  not  pay  to  employ  additional  capital  or 
labor,  because  each  increase  in  the  amount  of  labor  will  mean 
a  less  than  proportionate  increase  in  the  total  value  of  the 
product.  Thuenen  illustrated  this  principle  by  an  example 
drawn  from  agriculture,  in  which  the  point  of  diminishing 
returns  is  reached  more  rapidly  than  in  manufactures.  (See 
page  92.)  Take,  says  Thuenen,  the  work  of  gathering  the 
potatoes  that  have  been  raised  on  a  given  area  of  soil.  Sup- 
pose the  total  quantity  is  100  bushels.  Obviously,  it  is 
never  possible  to  gather  all  of  the  potatoes  actually  grown ; 
but  by  increasing  the  labor  employed  in  digging  over  the 
soil,  the  proportion  left  in  the  ground  may  be  reduced  to  a 
minimum.  The  results  are  indicated  by  the  following 
table :  — 


Laborers 
employed 

Bushels 
gathered 

Increase 

,     Laborers 
employed 

Bushels 
gathered 

Increase 

4 

80 

_ 

8 

96 

2. 

5 

86.6 

6.6 

9 

97.3 

1.3 

6 

91 

4.4 

10 

98.2 

0.9 

7 

94 

3. 

The  intelligent  farmer  will  continue  to  employ  additional 
laborers  only  as  long  as  each  laborer  produces  more  than  the 
equivalent  of  his  wages.  If,  in  the  above  example,  the  wages 
of  each  laborer  represent  the  value  of  one  bushel,  it  will  not 
pay  the  farmer  to  hire  the  tenth  laborer.  The  employer's 
total  profits  are  largest  if  he  ceases  to  employ  labor  after  the 
ninth  person.  To  give  the  tenth  man  wages  of  one  bushel 
for  adding  only  nine-tenths  of  a  bushel  to  the  total  prod- 
uct may  be  excellent  philanthropy,  but  it  is  poor  farming. 


THE   LAST   OR    MARGINAL   LABORER  511 

If  the  employer  hires  more  laborers,  despite  the  fact  that 
additional  laborers  cost  more  than  their  product  is  worth, 
he  will  ultimately  be  compelled  to  give  up  farming.  And 
as  most  producers  are  not  engaged  in  business  for  purposes 
of  philanthropy,  but  for  profit,  every  entrepreneur  (whether 
he  be  a  farmer  or  a  manufacturer)  will  endeavor  to  attain 
precisely  the  point  at  which  profits  are  highest.  Now  the 
net  profits  of  any  business  are  greatest  when  the  number 
of  laborers  has  reached  (but  not  passed  beyond)  the  point 
where  the  last  laborer  still  produces  more  additional  value 
than  he  costs  his  employer.  If  the  labor  of  the  last  man  is 
the  same  as  that  of  the  others,  —  and  we  have  supposed  that 
it  is,  although  the  results  of  his  labor  are,  of  course,  differ- 
ent because  of  circumstances  beyond  his  control,  —  it  is  evi- 
dent that  all  laborers  will  receive  the  same  wages,  because 
different  wages  cannot  be  paid  for  like  labor.  These  wages, 
moreover,  cannot  be  greater  than  the  productivity  of  the 
last  laborer  employed. 

The  term  last  or  additional  laborer  must  not  be  supposed 
to  mean  the  last  laborer  actually  employed,  for  all  the 
workers  may  be  hired  at  the  same  time.  What  the  term 
means  may  be  made  clearer  by  the  following  illustration. 

Here,  let  us  say,  is  a  manufacturer  who  is  sure  of  an  ex- 
cellent market  for  a  certain  kind  of  goods.  Suppose  that  he 
possesses  all  the  necessary  equipment  and  material  for  pro- 
duction— everything  except  labor.  For  such  an  entrepre- 
neur the  first  score  of  laborers  would  probably  be  extremely 
necessary,  and  produce  an'  extremely  valuable  output.  He 
could  therefore  afford  to  pay  them,  if  necessary,  very  high 
wages.  Probably  it  would  still  be  profitable  for  him  to  em- 
ploy a  second  score  of  workmen ;  but  the  resulting  increase 
in  the  supply  of  goods  would,  in  the  long  run,  decrease  the 
value  of  each  article  produced,  for  the  very  simple  reason 
that  an  increase  in  the  supply  —  other  things  being  equal  — 
must  necessarily  depress  values.  It  must  be  particularly 
borne  in  mind  that  the  workers  in  the  second  group  possess 


512  PRINCIPLES   OF  POLITICAL  ECONOMY 

precisely  the  same  skill  and  ability  as  the  first  group.  The 
value  which  their  labor  creates  will,  to  be  sure,  be  somewhat 
less  than  that  of  the  first  group.  But  this  is  due  to  no  fault 
of  theirs.  It  is  the  simple  and  natural  consequence  of  eco- 
nomic forces  from  which  there  is  no  escape.  In  the  example 
quoted  from  Thuenen  it  is  not  unlikely  that  the  nine  laborers 
were  employed  simultaneously;  in  such  a  case  it  would 
manifestly  be  absurd  to  pick  out  any  particular  laborer  as 
the  "last"  laborer,  or  the  laborer  who  " produces  least,"  yet, 
to  all  intents  and  purposes,  there  is  —  logically,  not  chron- 
ologically—  such  a  "last"  laborer. 

We  have  already  admitted  that  in  manufactures  the  law 
of  "  increasing  returns  "  may  result  in  a  more  than  propor- 
tionate gain  for  every  additional  laborer.  It  is  quite  possible, 
for  instance,  that  whereas  one  laborer  working  alone  pro- 
duces 4,  and  another  working  alone  produces  4  also,  both 
together  may  produce  10.  Take  either  of  them  away,  and 
the  product  is  reduced  by  6.  It  would,  in  this  case  also, 
manifestly  be  absurd  to  attribute  a  productivity  of  4  to  one 
laborer  and  of  6  to  the  other,  or  to  maintain  that  the  laborer 
who  happened  to  be  employed  last  in  point  of  time  produced 
less  than  the  other.  The  employment  of  additional  laborers, 
however,  will,  even  in  manufactures,  ultimately  find  a  limit 
beyond  which  it  would  be  unprofitable  for  the  entrepreneur 
to  go.  This  point  is  reached  when  the  product  made  by  the 
"  last "  or  "  marginal "  laborer  (the  latter  term  is  less  ambigu- 
ous than  the  former)  will  possess  a  value  scarcely  greater 
than  the  cost  of  his  labor  to  the  employer,  i.e.  his  wages.1 

1  The  "  marginal  productivity  theory  "  outlined  above  possesses  the  merit 
of  easily  explaining  the  close  relation  between  labor  and  capital  as  factors  of 
production.  To  a  considerable  degree,  labor  and  capital  may  be  substituted 
for  each  other.  As  a  matter  of  actual  business  practice,  the  entrepreneur 
may  often  choose  between  employing  more  laborers  or  employing  more  capi- 
tal. The  amount  that  he  will  employ  of  each  of  them  depends  partly  on  their 
utility  and  partly  on  their  cost.  (See  the  section  on  the  Nature  and  Laws  of 
Consumption.)  Where  labor  is  expensive  and  capital  comparatively  cheap 
(i.e.  as  compared  with  labor),  the  use  of  additional  increments  of  capital 


PRODUCTIVITY   OF   LABORERS  513 

As,  according  to  the  law  of  indifference,  there  cannot  be 
unequal  wages  for  equal  labor,  the  wages  received  by  the 
"marginal"  laborer  (the  laborer  whom  it  just  pays  the 
entrepreneur  to  employ)  must  determine  the  wages  paid 
to  all  the  other  laborers  of  the  same  kind  and  the  same 
ability.  It  may  therefore  be  said  that  the  wages  of  labor 
are  indeed  equal  to  the  product  of  the  laborer,  but  of  the 
laborer  who  finds  employment  under  the  least  favorable  con- 
ditions. Dr.  Stuart  Wood  summarizes  the  whole  theory  thus, 
"  The  price  of  all  labor  is  regulated,  as  are  the  prices  of  all 
commodities,  by  its  final  utility ;  by  the  utility,  that  is,  of 
the  portion  which  comes  into  use  last ;  that  portion,  in  short, 
whose  services  are  least  useful  and  least  highly  valued." 

It  is  obvious  that  this  theory  is  practically  an  extension  — 
some  writers  would  say  a  misuse  —  of  the  law  of  diminishing 
returns,  which  occupies  so  important  a  place  in  the  theory  of 
land  rent.  It  is  a  wider  application  of  the  rent  doctrine ; 
the  advocates  of  the  theory,  and  foremost  among  them  Pro- 
fessor J.  B.  Clark,  speak  constantly  of  "  distribution  by  a 
law  of  rent." l 

The  reader  will  recall  that  when  we  first  discussed  the 
problem  of  value  (page  63),  we  could  not  point  out  the 
cause  of  value,  for  the  simple-  reason  that  there  are  several 
causes.  We  must  reach  a  similar  conclusion  with  regard  to 

will  continue  longer  than  where  the  reverse  is  the  case.  In  our  Western 
states,  for  example,  it  is  found  more  profitable  to  employ  capital  than  labor, 
whereas  the  conditions  which  prevail  in  Russia,  for  instance,  would  dictate 
the  employment  of  more  labor  rather  than  more  capital. 

1  To  Professor  Clark,  in  particular,  is  due  the  credit  of  having  also  pointed 
out  the  difference  between  a  dynamic  and  a  static  theory  of  wages.  The 
static  theory  explains  wages  on  the  supposition  that  the  present  economic 
forces  continue  to  operate  precisely  as  they  do,  without  modification,  and 
that  free  competition  works  in  ideal  perfection.  "The  static  rate  of  wages, 
toward  which  actual  wages  are  always  tending,  is  fixed  by  the  productive 
power  of  labor  itself,  and  whatever  changes  that  productive  power  raises  or 
lowers  this  standard.  Workingmen  are  creating  daily  certain  amounts  of 
wealth ;  and  if  the  changes  and  disturbances  that  social  progress  implies 
should  cease,  and  if  certain  causes  of  friction  were  removed,  every  man 


514  PRINCIPLES   OF   POLITICAL   ECONOMY 

wages,  and  admit  that  there  is  probably  not  one  determinant 
of  wages,  but  several,  operating  with  varying  degrees  of  in- 
fluence at  different  times  and  under  different  circumstances. 
All  the  forces  that  influence  the  value  of  merchandise  also 
affect  the  value  of  manual  labor.  There  are,  moreover,  other 
determinant  influences  peculiar  to  wages,  —  such  as  public 
opinion,  threatened  strikes,  and,  above  all,  the  growing  con- 
sciousness among  workers  of  their  rights  and  their  social 
importance. 

IV.  The  Increase  of  Wages 

The  gradual  increase  of  wages  during  the  past  century 
seems  beyond  question.  Innumerable  statistics  from  all 
countries  show  that  wages  in  agriculture  as  well  as  in  man- 
ufactures have  been  more  than  doubled  during  the  nine- 
teenth century.  There  is,  to  be  sure,  much  difference  of 
opinion  among  statisticians  with  regard  to  the  precise  extent 
of  the  increase  of  wages.  And  in  view  of  the  almost  insur- 
mountable difficulties  involved  in  the  collection  of  reliable 
wage  statistics,  it  is  questionable  whether  the  cautious 
economist  can  attach  any  scientific  value  to  the  wage  and 
price  statistics  published  from  time  to  time  by  various 
authorities,  official  and  unofficial.  The  Twelfth  Census 
of  the  United  States  refrains  scrupulously  from  drawing 
any  conclusions  with  regard  to  the  probable  rise  or  fall  in 
wages  from  1890  to  1900.1 

would  get,  as  his  pay,  the  amount  that  he  actually  produces.  Ten  years 
hence  men  will  work  in  a  different  manner  and  with  different  appliances, 
and  if  we  could  then  stop  the  influences  of  change  and  let  competition  again 
do  its  full  work,  we  should  find  them  getting  amounts  that  would  correspond 
to  their  changed  powers  of  production."  ("The  Dynamics  of  the  Wages 
Question,"  Proceedings  of  the  American  Economic  Association,  February, 
1903.) 

1  See  Vol.  VII  of  the  Twelfth  Census,  pp.  cxi  ff.  Concerning  the  diffi- 
culties encountered  in  getting,  and  in  making  any  scientific  use  of,  wage 
statistics,  the  reader  should  consult  an  article  by  Professor  Mayo-Smith 
in  Vol.  I,  No.  1,  of  the  Political  Science  Quarterly,  and  the  same  author's 
"Statistics  and  Economics."  An  article  on  this  subject,  bringing  out 


INCKEASE   OF   WAGES 


515 


According  to  the  celebrated   Aldrich  Senate   Report  of 

1893  the  relative  rate  of  wages  in  the  United  States,1  in 

all    occupations,    from  1840   to   1891    (taking   the    rate  in 
1860  as  equal  to  100),  fluctuated  as  follows  :  — 


Period 

Single 
Average 

Average 
according  to 
Importance 

Period 

Single 
Average 

Average 
according  to 
Importance 

1840-1844  .     . 

87.2 

82.5 

1870-1874  .     . 

164.1 

165.8 

1846-1849  .     . 

90.2 

89.6 

1875-1879  .     . 

147.6 

146.7 

1850-1854  .     . 

92.3 

92.6 

1880-1884  .     . 

148.7 

152.2 

1855-1859  .     . 

98.9 

98.5 

1885-1889  .     . 

153.5 

157.8 

1860-1864  .     . 

108.0 

111.4 

1890-1891  .     . 

159.8 

168.4 

1865-1869  .     . 

154.9 

160.1 

(2  years) 

This,  apparently,  is  an  enormous  increase.  Yet  we  must 
not  overlook  a  number  of  circumstances  which  make  the 
increase  less  considerable,  and  less  beneficial  than  we  should 
at  first  suppose  it  to  be.  We  have  already  pointed  out,  in 
a  previous  section  of  this  chapter,  that  in  ascertaining  the 
actual  condition  of  laborers,  several  important  matters  must 
be  taken  into  consideration. 

(1)  In  the  first  place,  this  increase  of  wages  is  partly  nomi- 
nal^ and  due  in  a  measure  to  the  depreciation  of  money. 
Should  money  lose  half  its  purchasing  power,  what  does  it 
matter  to  the  workman  if  his  wages  have  increased  from  $1 
to  $2  per  day  ?  He  has  really  gained  nothing  by  the  change. 

Price  "statistics  are  therefore  the  indispensable  complement 
of  wage  statistics.  But  in  getting  and  in  employing  price 

various  conflicting  results  with  regard  to  the  actual  changes  in  the  rate  of 
wages  is  contained  in  Bliss'  "  Encyclopedia  of  Social  Reform." 

1  The  French  Labor  Bureau  (Office  du  Travail)  prepared  the  following  table 
for  the  Paris  Exposition  in  1900,  showing  the  increase  of  wages  in  France 
during  the  nineteenth  century.  (The  rate  for  1892  is  taken  as  equal  to  100.) 

1806 45  1860 70 

1830 49  1880 98 

1843 63  1892 100 

1856     ,  .    61  1900     .  103 


516  PRINCIPLES   OF   POLITICAL   ECONOMY 

statistics  as  the  basis  for  scientific  inferences  we  encounter 
quite  as  many  difficulties  as  in  the  case  of  wage  statistics. 
Satisfactory  records  of  prices  are,  from  the  nature  of  the  case, 
records  of  wholesale  prices,  while  the  laborer's  expenditure  is 
a  retail  expenditure,  and  retail  prices  vary  from  time  to  time 
and  from  place  to  place  in  the  most  arbitrary  fashion.  Vari- 
ations in  the  general  purchasing  power  of  money,  therefore, 
give  us  no  certainty  with  regard  to  the  changed  purchasing 
power  of  a  workman's  wages.  There  may  have  been  a  general 
decline  in  prices  simultaneous  with  a  rise  in  the  price  of  food 
or  fuel  or  some  other  equally  important  article  of  the  laborer's 
budget.  (See  the  section  on  the  Nature  and  Laws  of  Con- 
sumption.) In  any  estimate  of  the  changed  purchasing 
power  of  wages,  we  must  be  careful  not  to  attach  equal  im- 
portance to  the  prices  of  all  commodities,  but  to  give  excep- 
tional weight  to  those  commodities  which  are  the  laborer's 
principal  items  of  expenditure. 

There  seems  but  little  doubt  that  money  has  lost  some  of 
its  value  during  the  past  century,  and  that  this  depreciation 
of  money  has  caused  a  general  rise  in  prices.  About  1870, 
however,  the  rise  in  prices  seems  to  have  ceased  for  a  while, 
and  temporarily  given  place  to  a  fall.  Since  1897,  on  the 
other  hand,  there  has  been  an  almost  uninterrupted  rise  of 
prices.1  But  the  workman  is  most  concerned  with  the  prices 
of  those  goods  which  figure  largely  in  his  budget.  Certainly 
a  large  number  of  food  products,  such  as  meat,  vegetables, 
and  butter,  have  increased  in  price.  The  cost  of  renting 
houses  and  apartments  has  also  increased.  All  of  these  things 
play  an  important  part  in  the  laborer's  expenditure.  Bread, 
on  the  other  hand,  which  is  quite  as  important  an  item,  has 
not  increased  in  price.  As  we  shall  point  out  later,  in  dis- 
cussing the  laws  of  consumption,  the  smaller  the  income  the 
greater  is  the  relative  importance  of  the  price  of  food  for  the 
workingman's  family.  Thus,  in  families  having  an  annual 

1  The  Course  of  Wholesale  Prices  from  1890  to  1902  is  the  subject  of  Bul- 
letin No.  45  of  the  Department  of  Labor  (March,  1903). 


INCREASE   OF   WAGES 


517 


income  of  less  than  §200,  food  constitutes  about  half  the 
total  expenses,  whereas  in  families  having  11200  or  over,  it 
represents  only  one-fourth  of  the  total  consumption.  We 
should  also  note  that  there  has  been  a  fall  in  the  price  of 
many  important  commodities;  among  these  are  sugar,  spices, 
and  manufactured  goods,  such  as  clothing  and  furniture. 
Still  more  remarkable  has  been  the  decrease  in  the  cost  of 
transportation,  correspondence,  and  education. 

Having  already  given  the  wage  statistics  reported  by  the 
Aldrich  Senate  Committee,  we  quote  the  price  statistics 
given  by  the  same  authorities.  These  tables  give  the  relative 
prices  (in  gold)  by  five-year  periods;  the  second  column  gives 
the  price  for  all  articles  simply  averaged;  the  third  column 
averages  the  price  of  all  articles  according  to  their  relative 
importance  as  estimated  by  the  committee's  statisticians. 
To  facilitate  comparison,  we  give  the  wage  statistics  in  the 
fourth  column. 


Period 

Prices 
(averaged) 

Prices 
(estimated) 

Wages 
(gold) 

1840-1844    .      '  . 

108.8 

93.9 

87.2 

1845-1849    
1850-1854    
1855-1859    
1860-1864    

103.2 
106.6 
108.2 
108.1 

93.3 
99.4 
107.1 
95.3 

90.2 
92.3 
98.9 
91.6 

1865-1869    

118.7 

103.9 

105.3 

1870-1874    
1875-1879    
1880-1884    
1885-1889    
1890-1891    

121.8 
103.8 
105.3 
93.2 
92.3 

109.4 
102.0 
104.4 
96.7 
96.0 

145.4 

138.5 
148.7 
153.5 
159.8 

It  is  probably  not  far  from  the  truth  to  assume  that  the  cost 
of  living  for  the  average  workingman's  family  has  increased 
about  one-third  since  the  beginning  of  the  nineteenth  cen- 
tury ;  and  as  wages  have  increased  considerably  more  than 
this,  we  may  logically  infer  that  the  condition  of  the  work- 
ingman  has  improved,  —  his  real  wages  have  increased. 


518  PRINCIPLES   OF   POLITICAL   ECONOMY 

(2)  The  increase  in  wages,  though  real,  has  not  been  pro- 
portionate to  the  growth  of  general  prosperity.  In  other  words, 
the  wages  of  labor  have  increased  more  slowly  than  the  income 
of  the  other  classes  of  society.  Suppose  that  the  social  sur- 
plus divided  between  laborers  and  capitalists  fifty  years 
ago  was  two  billion  dollars,  each  class  receiving  one  billion. 
Suppose  that  to-day  the  surplus  has  increased  to  four  billion, 
of  which  the  laboring  classes  get  one  and  one-half  billion 
and  the  capitalists  two  and  one-half  billion.  In  this  case 
the  increase  of  wages,  though  real,  would  not  mean  a  genuine 
improvement  in  the  condition  of  laborers,  their  share  having 
increased  but  50  per  cent,  while  that  of  the  capitalists  has 
grown  150  per  cent,  or  three  times  as  rapidly.  To  be  sure, 
the  wage-earners  would  be  better  off  than  before,  absolutely 
speaking.  But  they  would  not  feel  any  richer  than  before, 
because  riches  are  purely  relative.  The  nature  of  man  is 
such  that  even  prosperity,  if  in  strong  contrast  with  the 
greater  prosperity  of  those  around  him,  may  seem  like 
poverty. 

From  the  standpoint  of  social  justice  we  must  admit  that 
the  laboring  class  is  entitled,  not  only  to  a  positive  improve- 
ment in  the  conditions  of  life,  but  also  to  an  increase  of 
income  at  least  proportionate  to  that  of  the  other  social 
classes.  Statistics,  however,  seem  to  show  that  the  income 
of  the  working  classes  has  not  kept  pace  with  the  general 
growth  of  wealth.1 

1  The  total  wealth  of  France,  for  example,  appears  to  have  increased  six- 
fold during  the  nineteenth  century,  —  an  increase  manifestly  much  greater 
than  that  of  wages,  inasmuch  as  the  latter  have  only  doubled  during  the 
same  period.  Yet,  as  Professor  Paul  Leroy-Beaulieu  has  pointed  out,  this 
great  increase  of  national  wealth  is  partly  an  apparent  increase  of  capital, 
not  a  real  increase,  because  of  the  changed  rate  of  capitalization,  which  is 
in  turn  due  to  a  fall  in  the  rate  of  interest.  An  independent  income  of,  say 
$3000,  from  the  ownership  of  government  bonds  or  other  securities,  was 
capitalized  thirty  years  ago  at  $60,000,  whereas  it  is  now  valued  at  $100,000 
because  the  rate  of  interest  has  fallen  from  5  to  3  per  cent.  Yet  the  income 
which  goes  to  the  owner  of  these  securities  is  really  no  greater  now  than 
then. 


INCREASE   OF    WAGES  519 

(3)  It  should  be  noted,  finally,  that  the  "  average  wages  " 
given  by  statistics  are  assumed  to  be  paid  regularly  through- 
out the  year.  But  in  many  trades  there  are  frequent  periods 
in  which  it  is  impossible  for  the  wage-earner  to  be  engaged 
productively ;  these  periods  of  obligatory  inactivity  are  called 
dead  seasons.  Again,  there  are  large  numbers  of  workmen 
who  cannot  find  employment  of  the  kind  for  which  they  are 
fitted,  and  who  therefore  do  not  earn  any  wages  at  all  during 
part  of  the  year,  or  who  must  turn  to  lower  occupations  with 
poorer  pay.  A  large  number  of  laborers,  moreover,  are  em- 
ployed only  part  of  the  week,  or  part  of  the  day,  or  are 
frequently  "laid  off  "  for  considerable  periods.1  The  danger 
of  "losing  work"  threatens  the  laborer  constantly;  unem- 
ployment is  becoming  a  chronic  ailment  of  our  present 
economic  system,  and  may  involve  an  enormous  reduction  in 
the  annual  wages  actually  received  by  the  laborer.  This 
danger  is  all  the  greater  when,  as  we  shall  see  is  now  the 
case,  there  is  no  effective  means  for  providing  against  it. 

Is  this  rise  of  wages  due  to  natural  or  to  artificial  causes ; 
that  is  to  say,  has  it  taken  place  spontaneously,  or  is  it  due 
to  the  influence  of  laborers,  or  to  that  of  the  government,  or 
perhaps  to  that  of  the  employers  themselves  ? 

The  uncompromising  members  of  the  classical  school  do 
not  believe  in  the  existence  of  artificial  means  for  increas- 
ing wages,  any  more  than  they  believe  in  artificial  means  for 
raising  prices.  They  maintain  that  the  rate  of  wages  is 

1  Mr.  Carroll  D.  Wright,  United  States  Commissioner  of  Labor,  and  cer- 
tainly a  conservative  authority  for  matters  of  this  sort,  said,  in  1886,  that 
there  are  probably  one  million  unemployed  persons  in  the  United  States  at 
any  one  time.  Even  laborers  who  have  regular  employment  are  out  of  work 
for  months  at  a  time.  In  Massachusetts  in  1885  the  average  loss  from  this 
source  for  all  the  employees  in  the  state  was  five  weeks  in  the  year.  In  1886, 
reports  concerning  85,329  representative  workingmen  showed  an  average  time 
at  work  of  37.1  weeks,  or  only  71.3  per  cent  of  full  time.  In  England,  Bax- 
ter estimates  that  the  great  body  of  working  people  are  employed  from  41 
to  44  full  weeks  per  year. 


520  PRINCIPLES    OF    POLITICAL    ECONOMY 

determined  by  natural  laws,  and  for  this  reason  is  beyond 
the  influence  of  human  intervention.  To  suppose  that  a 
labor  organization,  or  the  decrees  of  law,  or  even  the  gen- 
erosity of  an  employer  can  cause  an  increase  of  wages,  is 
as  puerile  as  to  suppose  that  we  can  cause  fine  weather  by 
shaking  the  barometer.  There  are,  to  be  sure,  cases  in  which 
a  successful  strike  has  been  followed  by  an  increase  of  wages. 
But,  the  ultra-liberals  declare,  in  such  a  case  wages  were 
bound  to  rise  anyway.  A  strike  may  act  in  much  the  same 
way  as  a  light  tap  on  the  glass  of  a  barometer,  causing  the 
instrument  to  adjust  itself  a  trifle  more  readily  to  the  forces 
operating  on  it  and  therefore  to  take  its  proper  position  more 
quickly.  They  declare,  —  abandoning  the  figure  of  speech,— 
that  all  we  can  do  is  to  make  labor  more  mobile,  quickly 
transferable  from  one  place  to  another,  or  from  one  occupa- 
tion to  another,  by  giving  the  widest  possible  scope  to  the 
law  of  demand  and  supply.  This  alone  is  sufficient  to  cause 
the  price  of  labor  to  rise  gradually,  as  the  result  of  that 
general  increase  of  wealth  which  naturally  takes  place  in 
prosperous  communities. 

A  proof  of  this,  they  maintain,  lies  in  the  fact  that  the 
increase  of  wages  has  by  no  means  been  confined  to  occupa- 
tions in  which  there  are  most  strikes.  On  the  contrary,  it 
has  come  to  workers  who  never  strike  at  all,  and  who  are 
not  even  organized ;  e.g.  agricultural  laborers  and  domestic 
servants. 

There  is  no  doubt  that  the  increase  of  wages  during  the 
nineteenth  century  is  due  largely  to  natural  causes,  or  rather 
to  economic  causes  which  may  be  summed  up  in  the  phrase  : 
increased  productivity  and  increased  general  wealth.  But 
there  are  also  other  causes,  foremost  among  which  is  the 
growing  and  deepening  sentiment  on  the  part  of  working- 
men  that  they  are  entitled  to  an  increasing  share  of  the 
wealth  which  they  have  helped  to  produce.  We  must  not 
forget  that  fixing  the  price  of  manual  labor,  like  fixing  the 
price  of  any  other  commodity,  always  pre-supposes  a  certain 


SHORTENING   THE   WORK-DAY  521 

amount  of  higgling ;  and  if  the  two  parties  to  the  transaction 
are  of  unequal  power  or  knowledge,  the  greater  advantage 
will  always  accrue  to  the  stronger  party.  The  intervention 
of  law,  the  influence  of  labor  organizations,  and  sometimes 
strikes,  are  effective  means  of  accomplishing  a  new  and  more 
favorable  adjustment  of  wages. 

V.     The  Hours  of  Labor 

Wages  are  only  one  aspect  of  the  worker's  life  ;  the  length 
or  quantity  of  labor  is  quite  as  important  a  matter.  The 
worker's  condition  may  be  improved  by  reducing  his  work, 
as  well  as  by  increasing  his  pay. 

Shortening  the  work-day  is  one  of  the  reforms  to  which 
great  importance  is  now  attached.  Socialists  regard  it  as  a 
means  of  emancipating  the  laborer,  of  liberating  him  from 
the  exploitation  of  employers,  and  of  preparing  him  for  the 
social  and  political  struggle  for  class  supremacy.  Laborers 
generally  regard  this  reform  as  meaning  less  work  with  the 
same  wages,  —  perhaps  with  even  higher  wages,  because  of 
the  artificial  scarcity  of  labor  resulting  from  less  hours  of 
work.  But  the  greatest  significance  of  this  movement  lies 
in  the  fact  that  it  gives  increased  opportunity  for  the  in^ 
tellectual,  moral,  and  even  physical  improvement  of  the 
laboring  classes,  by  providing  the  leisure  necessary  for  re- 
creation, that  is  to  say,  by  enabling  the  workers,  during  a 
greater  part  of  each  day,  to  cease  being  mere  productive 
machines  and  to  become  men.  A  man's  trade  should  not  be 
his  sole  occupation ;  some  time  and  attention  should  be  de- 
voted to  home  life  and  to  the  occupations  of  citizenship. 

It  is  often  said  that  modern  business  relations  are  so  com- 
plex, and  competition  among  modern  nations  so  intense,  that 
it  would  be  difficult  for  one  country  to  shorten  the  day  of 
labor  without  placing  itself  in  a  position  of  exceedingly  dan- 
gerous competitive  inferiority.  An  effort  has  therefore  been 
made  to  reach  some  international  agreement  among  civilized 


522  PRINCIPLES    OF   POLITICAL   ECONOMY 

nations  with  regard  to  the  hours  and  conditions  of  labor; 
but  this  international  problem  is  much  more  difficult  of 
solution.1  Without  doubt,  international  regulation  of  such 
matters  as  this  is  desirable  ;  but  each  nation  should  not  make 
this  a  pretext  for  waiting  until  others  take  the  first  step. 
Experience  has  demonstrated  that  countries  which  are 
ethically  far  enough  advanced  to  limit  the  hours  of  work 
are  also  sufficiently  advanced  industrially  not  to  fear  the 
competition  of  countries  having  longer  work-days. 

This  problem,  however,  cannot  be  solved  without  due 
reference  to  the  sex  and  age  of  the  individual  worker ;  we 
cannot  apply  the  same  principles  indiscriminately  to  the  labor 
of  men,  women,  and  children. 

§  1.  Child  Labor.  All  civilized  countries,  with  but  a  few 
shameful  exceptions,  forbid  the  employment  of  young  chil- 
dren in  factories  and  workshops.  But  the  age  limit,  below 
which  children  are  not  allowed  to  work,  varies  from  nation 
to  nation,  and  in  the  United  States  from  state  to  state. 
"  The  underlying  idea  is  that  children  should  be  withdrawn 
from  the  stunting  influence  of  confinement  in  workshops ; 
and  that  they  should  attend  school  and  become  fitted  for 
future  usefulness." 

Usually  the  law  provides  that  no  child  under  ten  years  of 
age  shall  be  employed,  and  that  those  from  ten  to  fourteen 
must  have  a  certain  amount  of  schooling  and  a  sufficient 
amount  of  time  for  rest  and  recreation.  For  these,  as  well 
as  for  "young  persons"  aged  from  fourteen  to  eighteen, 
there  are  limitations  with  regard  to  the  number  of  hours  per 
day,  interruptions  for  rest  and  meals,  the  allowable  amount 

1  In  April,  1890,  an  international  conference  on  labor  questions,  called  by 
the  Emperor  of  Germany,  met  at  Berlin.  The  conference  passed  a  series 
of  resolutions  ;  but  having  no  power  to  bind  the  nations  represented  at  the 
conference,  they  have  continued  to  be  merely  desiderata. 

In  1900,  an  International  Association  for  the  Legal  Protection  of  Workers 
was  founded  at  Paris,  at  the  instigation  of  several  French  and  Belgian  pro- 
fessors of  political  economy.  The  central  office  of  this  organization,  which 
meets  annually,  is  at  Bale,  Switzerland. 


CHILD   LABOR  523 

of  "  overtime,"  and  rest  on  holidays  and  Sundays.  Certain 
dangerous  or  unhealthful  occupations  are  sometimes  entirely 
forbidden  to  children  and  minors,  and  night-work  is  in  most 
occupations  not  allowed  to  persons  of  less  than  eighteen  years 
of  age.1 

It  must  not  be  supposed,  however,  that  these  humanitarian 
limitations  on  the  labor  of  children  were  enacted  without 
opposition.  The  campaign  against  child  labor,  begun  in 
England  in  1802,  owes  its  ultimate  success  in  1844  to 
the  heroic  perseverance  of  the  Earl  of  Shaftesbury.  "  The 
beginning  of  the  present  century,"  says  Francis  Walker, 
"found  children  of  five  and  even  three  years  of  age  in 
England  working  in  factories  and  brick-yards;  found  the 
hours  of  labor  whatever  the  avarice  of  individual  mill-owners 
might  exact,  were  it  13,  14,  or  15 ;  found  no  guards  about 
machinery  to  protect  life  and  limb;  found  the  air  of  the 
factory  fouler  than  language  can  describe,  even  could  human 
ears  bear  to  hear  the  story."  As  there  were  practically  no 
facilities  for  boarding  the  thousands  of  children  that  were 
herded  together  in  the  factory  towns  of  England,  "  apprentice 
houses  "  were  built  for  them,  —  miserable  barracks  where  they 
were  placed  under  the  care  of  superintendents  or  matrons. 
When  the  demands  of  trade  were  active  they  were  often 

1  A  statement  of  the  per  cent  of  children  employed  in  the  United  States  is 
given  on  page  135,  note  2.  The  last  census  states  that  in  1900  there  were 
1,755,210  persons  between  10  and  15  years  of  age  employed  in  gainful  occupa- 
tions. These  figures  are  probably  much  too  small ;  recent  investigations  in 
several  states  indicate  a  much  larger  number  than  the  census  reports.  The 
student  will  find  a  somewhat  too  optimistic  discussion  of  this  matter  in 
Carroll  D.  Wright's  "  Practical  Sociology  "  (1902). 

A  summary  of  European  labor  laws  may  be  found  in  Volume  XVI  of  the 
Report  of  the  U.  S.  Industrial  Commission  (1901)  and  in  Emma  Brooke's 
"Tabulation  of  the  Factory  Laws  of  European  Countries"  (London,  1898). 
A  summary  of  our  own  labor  laws  may  be  found  in  Volume  V  of  the  Report 
of  the  U.  S.  Industrial  Commission  (1900)  and  the  second  special  report  of 
the  U.  S.  Commissioner  of  Labor  for  1896,  supplemented  by  the  bi-monthly 
bulletins  of  the  Department  of  Labor.  These  bulletins  also  contain  (Nos.  25, 
26,  27,  28,  30,  and  33)  excellent  sketches  of  the  labor  legislation  of  foreign 
countries,  written  by  W.  F.  Willoughby. 


524  PRINCIPLES   OF   POLITICAL   ECONOMY 

arranged  in  two  shifts,  each  working  twelve  hours,  one  set 
climbing  into  bed  as  the  other  got  out.  They  were  fre- 
quently required  to  snatch  their  coarse  food  while  the 
machinery  was  in  motion,  and  much  of  the  time  which 
should  have  been  devoted  to  rest  was  spent  in  cleaning  the 
machinery.1 

The  adversaries  of  laws  against  this  state  of  affairs  argued 
that  it  was  the  business  of  the  parents  to  look  after  their 
children,  not  that  of  the  state.  Although  there  may  have 
been  some  exaggeration  in  the  extremely  sombre  -  picture 
drawn  by  the  advocates  of  factory  laws,  there  can  be  no 
doubt  that  there  was  a  most  abominable  traffic  in  the  labor 
of  children,  conducted  on  a  very  large  scale. 

§  2.  The  Labor  of  Women.  In  the  case  of  women  the 
problem  is  more  difficult.  With  the  introduction  of  ma- 
chinery under  the  so-called  factory  system,  it  became  possible 
and  profitable  to  employ  the  labor  of  women,  which  is 
cheaper  than  that  of  men.  So  many  occupations,  moreover, 
have  recently  been  thrown  open  to  women  that  there  has 
been  a  rapid  increase  in  the  proportion  of  females  to  the 
whole  number  of  persons  engaged  in  some  of  the  principal 
trades  and  professions.2  The  fear  has  therefore  been  some- 
times expressed  that  women  are  crowding  men  out  of 
employment. 

Some  persons  have  advocated  the  entire  exclusion  of  women 
from  factories  and  workshops.  They  urge,  in  favor  of  this 

1  See  Cheyney's  "  Industrial  and  Social  History  of  England"  (Macmillan, 
1901). 

2  Harriet  Martineau  in   1840  found  only  seven  employments  open  to 
women — teaching,  needle  work,  keeping  boarders,  working  in  cotton  mills, 
in  book  binderies,  type-setting,  and  household  service. 

In  the  United  States,  women  artists  and  teachers  of  art  increased  from 
10. 10  per  cent  of  the  total  in  1870  to  44. 3  per  cent  in  1900.  In  the  occupations 
of  book-keepers,  clerks,  and  saleswomen,  the  rise  was  from  3.47  per  cent  in 
1870  to  21  per  cent  in  1900 ;  in  telegraph  and  telephone  operators  from  4.27 
per  cent  to  30.1  per  cent  in  the  same  period.  Of  the  whole  number  of  public 
school  teachers  in  the  United  States  69.7  per  cent,  and  in  some  of  the  New 
England  states  more  than  91  per  cent,  are  women. 


LABOK   OF   WOMEN  525 

measure,  that  the  industrial  employment  of  women  destroys 
the  family  and  the  home,  gives  rise  to  a  terribly  high  death- 
rate  among  the  children  of  women  thus  employed,  and  exposes 
women  and  girls  to  morally  and  physically  pernicious  influ- 
ences ;  in  the  case  of  pregnant  women,  the  health  of  the 
mother  and  child  is  jeopardized,  and  the  risk  of  abortion  and 
still-births  is  greatly  increased. 

But,  on  the  other  hand,  it  should  be  urged  that  at  a  time 
when  so  much  is  being  said  in  favor  of  the  emancipation  of 
women  and  the  equality  of  the  sexes,  it  would  be  strangely 
illogical  to  prevent  women  from  earning  a  living  by  their 
own  labor.  Unmarried  women  find  it  hard  enough  now  to 
earn  an  honest  living ;  their  condition  would  certainly  not  be 
improved  by  closing  the  factory  doors  to  them.  It  would  be 
necessary,  at  all  events,  to  exempt  from  this  prohibition  all 
those  women  who  have  no  husbands  or  children,  and  who  conse- 
quently have  no  one  to  support  them.1  The  outcome  of  this 
discussion,  therefore,  is  a  sort  of  compromise.  Women  are 
usually  not  forbidden  to  work  in  factories,  but  in  many 
countries  they  are  not  allowed  to  engage  in  certain  danger- 
ous or  objectionable  kinds  of  labor,  such  as  mining ;  in  some 
countries  night-work,  and  work  during  a  period  of  several 
weeks  after  child-bearing,  are  likewise  prohibited. 

There  is  no  general  law  in  any  of  the  United  States  limiting 
the  hours  of  labor  of  adult  women ;  but  fifteen  states  limit 
the  length  of  female  labor  in  factories  and  mechanical  or 
industrial  occupations,  —  usually  to  10  hours  a  day  and  60 
hours  a  week. 

§  3.  Adult  Male  Labor.  In  the  case  of  adult  males  the 
problem  of  legal  limitation  is  even  more  difficult.  It  is, 
of  course,  entirely  out  of  the  question  to  forbid  their  labor  in 
factories.  The  question  is  whether  it  should  in  any  way  be 

1  To  do  this  would,  however,  probably  discourage  marriage  and  legitimate 
maternity,  and  this  would  be  the  worst  possible  measure  for  such  a  country 
as  France,  for  example,  in  which  there  are  even  now  too  many  bachelors  and 
too  many  sterile  marriages. 


526  PRINCIPLES    OF    POLITICAL    ECONOMY 

limited  or  restricted.  The  liberal  school  argues  that  adult 
individuals  ought  to  be  entirely  free  to  regulate  the  use  of 
their  time  and  of  their  labor,  and  that  they  are  the  best 
judges  of  their  own  interests.  But  to  this  assertion  we  may 
reply  that,  as  a  matter  of  fact,  under  the  present  system  of 
large-scale  production,  this  liberty  is  impossible.  The 
laborer  must  start  work  when  the  factory  whistle  blows ;  he 
must  stop  when  the  factory  stops.  No  matter  what  may  be 
his  own  desire  in  the  matter,  he  must  work  the  number  of 
hours  exacted  by  the  employer,  or,  rather,  the  number 
required  by  custom  or  by  competition.  There  is  no  scope 
for  the  choice  or  the  liberty  of  the  individual  laborer.  The 
question,  therefore,  is  whether  or  not  a  reduction  of 
hours  would  contribute  to  the  welfare  of  the  working 
class  as  a  whole,  and  whether,  considering  the  question  in 
a  still  wider  aspect,  such  a  reduction  would  result  in  an 
improvement  of  the  human  race.  The  experience  of 
countries  in  which  this  reduction  has  already  been  carried 
out  seems  to  furnish  conclusive  evidence  on  this  point. 

We  are  naturally  disposed  to  believe  that  a  decrease  in 
the  hours  of  labor  would  necessarily  mean  a  diminution  of 
the  product  and  a  fall  in  wages.  This,  in  fact,  is  the  usual 
objection  to  shortening  the  work-day.  Actual  experience 
along  this  line,  however,  proves  quite  the  contrary.  Labor- 
ers who  work  for  a  shorter  period,  who  are  less  exhausted 
by  long-continued  labor,  and  who  have  more  time  for  intel- 
lectual, moral,  and  physical  development,  will  produce  more ; 
and  if  they  produce  more,  it  is  extremely  improbable  that 
their  wages  will  be  diminished.  As  a  matter  of  fact,  the 
countries  in  which  the  day  of  labor  is  shortest  (Australia, 
England,  and  the  United  States)  are  also  those  in  which  the 
highest  wages  are  paid  and  in  which  the  product  per  laborer 
is  greatest.1 

1  This  theory  must  not,  of  course,  be  carried  to  the  absurd  extreme  of 
maintaining,  as  socialists  are  in  the  habit  of  doing,  that  the  shorter  the  work- 
day the  greater  the  product.  Socialists  sometimes  also  advance  contradict- 


ADULT   MALE   LABOR  527 

Limitation  of  the  hours  of  labor  by  law,  however,  is 
still  the  exception  rather  than  the  rule.  France  set  th^ 
example  more  than  half  a  century  ago  by  the  law  of  1848, 
which  fixed  the  maximum  daily  period  of  labor  at  twelve 
hours.  But  this  law,  which  was  then  far  in  advance 
of  economic  evolution,  remained  a  dead  letter  until  quite 
recently. 

In  the  United  States  numerous  statutes  have  been  enacted 
regulating  the  hours  of  labor,  although  as  a  rule  the  courts 
are  inclined  to  insist  that  the  law  shall  not  interfere  in  the 
purchase  and  sale  of  labor  more  than  in  dealings  in  any 
other  commodity.  Many  of  the  state  laws,  therefore,  merely 
fix  what  shall  be  regarded  as  a  full  day's  labor  in  the 
absence  of  any  contract  between  the  parties ;  others,  under 
the  police  power  of  the  state,  fix  the  hours  of  labor  in  occu- 
pations specially  dangerous  or  unsanitary,  or  in  which  the 
safety  of  the  public  is  specially  concerned.  Seven  states 
have  passed  laws  declaring  that  eight  hours  shall  be 
regarded  as  a  lawful  day's  work  in  general  occupations 
unless  otherwise  expressly  agreed.  In  six  states  the  time  is 
fixed  by  statute  at  ten  hours.  The  hours  of  labor  in  work 
done  directly  for  the  state  or  any  municipal  corporation 
have  been  limited  in  many  states,  as  well  as  by  act  of  Con- 
gress, which  has  power  to  prescribe  hours  of  labor  on  gov- 
ernment works  although  territorially  they  are  not  within  its 
jurisdiction. 

Laborers  themselves  naturally  advocate  a  shorter  work- 

ory  arguments  by  asserting,  on  the  one  hand,  that  shorter  work-days  will 
make  labor  more  productive,  and,  on  the  other  hand,  that  shorter  work- 
days will  give  employment  to  a  larger  number  of  laborers,  and  thus  do  away 
with  the  "army  of  unemployed."  It  is  perfectly  obvious  that  if  a  shorter 
work-day  does  not  curtail  the  product,  there  will  be  no  need  for  employing 
additional  laborers.  These  two  arguments  are  incompatible. 

The  truth  of  the  matter  is  that  a  shorter  work-day  may  very  well  be 
accompanied  by  an  increased  intensity  of  labor,  and,  consequently,  increased 
productivity.  But  this  result  can  be  attained  only  among  exceptional, 
highly  civilized  peoples,  capable  of  very  intense  labor,  and  in  countries  pos- 
sessing very  complete  industrial  equipment. 


528  PRINCIPLES    OF   POLITICAL   ECONOMY 

day  than  is  now  customary.     Like  the  old  English  song,  they 

want 

"Eight  hours  for  work,  eight  hours  for  play, 
Eight  hours  for  sleep,  and  eight  shillings  a  day." 

This  minimum,  however,  has  nowhere  been  established  by 
law ;  and  as  a  matter  of  fact  the  eight  hour  work-day  exists 
in  very  few  countries.1 


VI.   Trades  Unions 

Under  ordinary  circumstances  the  workman  who  deals 
individually  with  the  employer  is  at  a  considerable  disad- 
vantage. There  are  three  reasons  for  this :  — 

(1)  The  capitalist  can  wait,  whereas  the  laborer  cannot. 
The   latter   possesses   a  commodity  which  he   must  sell  in 
order  to  live;    this  commodity  is  his  labor. 

(2)  As  a  rule,  the  entrepreneur  can  get  along  without  the 
workman,  when  the  latter  stands  alone,  whereas  the  work- 
man cannot  readily  dispense  with  the  employer.      It  is  an 
easy   matter    to    find    another    laborer ;    laborers    can    be 
imported  from  abroad,  if   need  be,  or  their   place  can  be 
taken  by  a  machine.      But  it  is  not  so  easy  to  find  a  new 
employer ;    employers  cannot  be  induced  to  come  where  the 
laborers  want   them,    and   we   have   not   yet   discovered   a 
machine  that  will  take  their  place. 

1  In  England  the  day  of  labor  is  usually  nine  hours  long  ;  in  the  United 
States,  from  eight  to  nine  hours  ;  in  Australia  it  has  been  eight  hours  since 
half  a  century  ago.  These  limitations,  however,  are  not  due  to  law,  but  to 
the  influence  of  labor  organizations. 

The  eight-hour  day  was  obtained  by  the  working  classes  in  Australia 
sooner  than  in  the  United  States  or  in  England  because  of  the  great  distance 
which  separates  Australia  from  other  civilized  countries,  and  which  protects 
it  to  some  extent  from  the  competition  of  foreign  labor. 

There  are  a  number  of  countries  which,  like  the  United  States,  limit  the 
number  of  hours  per  day  for  the  labor  of  government  employees.  This  limi- 
tation, however,  does  not  apply  to  labor  under  private  contract,  —  a  circum- 
stance which  we  must  be  careful  not  to  overlook. 


LABOR   ORGANIZATIONS  529 

(3)  The  entrepreneur  is  more  familiar  with  the  condition 
of  the  market ;  he  has  better  opportunities  for  grasping  the 
whole  economic  situation  and  taking  advantage  of  it.  It  is 
easy  for  him  to  reach  an  understanding  with  his  competi- 
tors, or  at  least  to  know  what  they  are  doing. 

For  these  reasons  the  labor  contract  has  generally  been  a 
free  contract  in  name  only.  As  long  as  workmen  are 
obliged  to  deal  individually  and  separately  with  the  head  of 
a  large  industrial  concern,  they  cannot  protect  their  own 
interests  or  even  debate  the  rate  of  wages.  All  they  can  do 
is  to  accept  or  refuse  the  terms  offered  by  the  employer ; 
and  under  the  pressure  of  want  they  are  obliged  to  agree  to 
the  employer's  proposition. 

But  when  laborers  in  the  same  trade  form  an  organiza- 
tion, employer  and  employee  are  more  likely  to  be  on  an 
equal  footing,  for  the  following  reasons :  — 

(1)  Labor  organizations  enable  the  workman  to  refuse  to 
work  when  the  terms  of   employment   are  unsatisfactory ; 
they  support  him,  during  the  period  of  unemployment,  by 
means  of  dues  or  assessments  contributed  by  the  members  of 
the  organization.    When  these  organizations  possess  sufficient 
means,  they  set  aside  a  fund  for  the  support  of  unemployed 
members,  in  order  to  prevent  workmen  from  being  obliged 
to  accept  the  unfavorable  terms  offered  by  employers. 

(2)  Labor  organizations  unite,  all  the  workmen  in  each 
branch  of  production ;  hence,  the  employer  cannot  deal  with 
individual  laborers,  but  must  transact  with  a  whole  group 
of  laborers  or  their  representatives.      The  individual  labor 
contract,  which  ought  not  to  be  called  a  "  contract "  at  all, 
thus  gives  way  to  collective  bargaining. 

(3)  Labor  organizations  provide,  so  to  speak,  bureaux  of 
information  for  laborers ;    they  make  it  possible  for  them  to 
have  competent  and  experienced  leaders,  who  are  quite  as 
capable  of  familiarizing  themselves  with  the  industrial  situ- 
ation as  the  employers,  and  who  are  therefore  able  to  pre- 
vent unwise  conduct  on  the  part  of  the  laborers. 


530  PRINCIPLES   OF  POLITICAL  ECONOMY 

To  the  economists  who  maintain  that  trades  unions  can- 
not arbitrarily  fix  the  rate  of  wages,  we  must  reply  that  this 
is  not  their  purpose.  All  they  seek  to  do  is  to  obtain  the 
wages  justified  by  the  general  state  of  the  market,  and  not 
the  rate  determined  by  certain  accidental  circumstances, 
such  as  the  relative  poverty  of  the  laborers  and  the  dire 
want  of  food  that  sometimes  obliges  them  to  accept  the 
employer's  terms. 

Yet  the  right  to  meet  together  and  to  form  associations 
for  the  defence  of  their  interests  and  the  improvement  of 
their  condition  has  but  recently  been  acquired  by  the  labor- 
ing classes  of  most  countries.  Ordinarily,  the  first  step 
accomplished  by  the  working  classes  was  the  acquisition  of 
the  so-called  right  of  coalition,  i.e.  the  right  to  act  as  a  unit 
in  demanding  certain  terms  of  employment,  and  in  case  of 
refusal,  to  abandon  work  and  to  "strike."  This  privilege 
was  granted  in  England  in  1824,  and  in  France  by  the  Law 
of  1864. 1  In  Russia  it  has  until  quite  recently  been  a  mis- 
demeanor for  employees  to  strike.  It  appears  that  strikes, 
in  themselves,  have  never  been  illegal  in  the  United  States. 

But  the  right  merely  to  act  jointly  is  not  enough ;  for 
in  order  to  be  effective,  the  claims  of  laborers  must  be 
backed  not  only  by  an  occasional  and  temporary  agreement 
among  themselves,  but  by  permanent  understandings 
through  the  medium  of  lab.pr  organizations.  The  right  to 
organize  permanent  associations  of  this  nature  was  not 
granted  by  law  in  England  until  1871,  and  in  France  until 
1884. 

Associations  of  laborers  belonging  to  the  same  trade  are 
not  new  institutions,  but  date  from  the  Middle  Ages.  Their 
prototype,  however,  was  not  the  medieval  guild,  properly 
speaking,  —  for  the  guild  was  generally  composed  only  of 
masters,  and  therefore  resembled  the  modern  employers' 

JA  "lockout"  may  be  defined  as  a  strike  on  the  part  of  employers, 
when  they  determine  to  close  their  establishments  until  the  employees  accept 
such  terms  as  the  employers  choose  to  offer. 


ENGLISH   TRADES   UNIONS  531 

syndicate,  —  but  the  journeymen's  corporation  or  guild,  com- 
posed of  workers  who  were  not  allowed  to  enter  the  guild 
proper.  Associations  of  this  sort,  old  as  they  are,  have  only 
recently  begun  to  play  an  important  part  in  the  economic 
field.  In  England  and  in  Austria,  labor  organizations  have 
acquired  great  prominence  because  of  their  admirable  organi- 
zation. In  English-speaking  countries  they  are  commonly 
called  trades  unions. 

England  is  the  classic  country  of  trades  unions.  At 
the  beginning  of  the  year  1902,  there  were  1236  trades 
unions  in  England,  having  1,922,780  members.  Of  this 
number,  120,078  were  women,  90  per  cent  of  whom 
were  employed  in  the  textile  industries.  Only  4  per  cent 
of  the  laboring  women  are  organized,  but  more  than  one- 
fourth  of  the  male  workers  belong  to  trades  unions.  These 
organized  male  laborers  are  very  unequally  distributed 
among  the  various  trades ;  there  are  few  of  them  in  the 
food-producing  occupations  and  among  tailors,  whereas  the 
Amalgamated  Society  of  Engineers,  for  instance,  has  over 
90,000  members.  Many  of  the  English  trades  unions  are 
wealthy  organizations,  grouped  into  powerful  federations, 
directed  by  prudent  and  distinguished  men,  some  of  whom 
have  been  elected  to  the  House  of  Commons.  Their  great 
Annual  Congresses  are  events  of  much  public  importance. 
Until  recently,  they  have  not  lent  their  influence  to  the 
propagation  of  socialistic  ideas,  but  have  devoted  themselves 
to  the  more  practical  task  of  increasing  wages  or  reducing 
the  hours  of  labor  without  asking  for  government  interven- 
tion. They  have  been  moderate  in  the  use  of  strikes  as  a 
method  of  industrial  conflict,  preferring  to  employ  the 
greater  part  of  their  funds  to  provide  assistance  for  unem- 
ployed, sick,  or  disabled  members,  or  for  those  who  are  too 
old  to  work.1  In  fact,  the  conservative  spirit  of  the  older 

1  In  1901,  one  hundred  of  the  most  prominent  English  trades  unions  had 
an  income  of  about  $10,000,000.  Their  expenditures  during  the  same  year 
were  divided  as  follows  :  payments  to  sick  and  injured  members,  $1,700,000; 


532  PRINCIPLES    OF   POLITICAL    ECONOMY 

unions,  composed  chiefly  of  skilled  workmen,  has  exposed 
them  to  the  charge  of  attempting  to  build  up  an  aristocracy 
of  laborers  and  of  having  no  sympathy  for  unskilled  and 
unorganized  labor. 

Since  the  famous  London  dock-laborers'  strike  in  1889,  the 
unionist  movement  has  extended  to  the  ranks  of  unskilled 
laborers,  who  have  formed  numerous  organizations,  with  lim- 
ited resources  and  showing  a  pronounced  tendency  toward 
socialism  and  active  participation  in  politics.  This  tendency, 
sometimes  called  "the  new  unionism,"  has  brought  the 
trades  unions  into  closer  sympathy  with  government  inter- 
vention and  collectivism,  —  especially  the  nationalization  of 
land  and  mines. 

In  respect  to  the  strength  of  labor  organizations,  the  United 
States,  to  say  the  least,  now  begins  to  rival  Great  Britain. 
The  beginnings  of  American  trade-unionism  are  unknown, 
but  there  appears  to  have  been  an  association  of  journeymen 
shoemakers  in  Philadelphia  as  early  as  1792.  Most  of  the 
organizations  founded  before  the  Civil  War  were  purely 
local.  The  National  Labor  Union,  organized  in  1866,  as  well 
as  several  subsequent  attempts  to  establish  a  general  associa- 
tion of  laborers,  enjoyed  but  a  brief  and  precarious  existence. 

The  first  general  organization  to  acquire  national  promi- 
nence was  the  Knights  of  Labor,  started  in  1869.  This 
order  aimed  to  unite  all  workingmen  in  one  great  organiza- 
tion, with  the  key-thought  that  "  an  injury  to  one  is  the 
concern  of  all."  By  1886  the  organization  had  a  member- 
ship of  over  500,000.  Its  growth,  in  fact,  was  too  rapid.  The 
order,  moreover,  showed  too  little  respect  for  the  autonomy 
of  each  craft,  and  its  leaders  undertook  to  exercise  dictatorial 
powers.  Hence  a  violent  reaction  set  in,  and  some  of  the 
trades  unions  organized  a  Federation  of  Trade  and  Labor 

to  members  without  employment,  $1,600,000 ;  for  carrying  on  strikes, 
$1,000,000;  old  age  pensions,  $1,000,000;  funeral  expenses  of  deceased 
members,  $500,000.  The  average  dues  per  member,  in  these  unions,  was 
about  $8  per  annum. 


THE   AMERICAN   FEDERATION    OF   LABOR  533 

Unions,  which  later  became  the  American  Federation  of 
Labor.  This  Federation,  now  the  greatest  labor  organiza- 
tion in  the  country,  recognizes  the  autonomy  of  the  separate 
crafts,  but  federates  them  for  purposes  of  strength.  In  1894 
the  socialists  endeavored  to  commit  the  Federation  to  a  plat- 
form of  complete  socialism,  but  their  efforts  met  with  no 
permanent  or  important  success.  In  the  latter  part  of  1902, 
the  Federation  included  nearly  1800  local  and  city  trades 
unions,  with  an  aggregate  membership  of  2,000,000;  it  pub- 
lishes over  200  weekly  and  monthly  papers  devoted  to  the  cause 
of  labor,  and  officially  declares  its  object  to  be  to  render  employ- 
ment and  the  means  of  subsistence  less  precarious  by  securing 
to  the  workers  an  equitable  share  of  the  fruits  of  their  labor. 

Several  national  unions,  however,  are  not  affiliated  with 
the  American  Federation  of  Labor;  their  total  membership 
is  probably  about  300,000.  The  Knights  of  Labor  now 
number  not  more  than  40,000.  In  addition  to  these 
national  labor  organizations,  there  are  international  as- 
sociations of  workingmen,  and  also  trades  unions  that  are 
confined  to  particular  localities.  The  typical  local  union 
includes  only  members  who  live  and  work  in  one  town,  and 
its  business  is  done  by  vote  of  all  the  members,  meeting  in 
one  place.  The  national  and  international  unions  are  made 
.up  of  these  local  unions,  which  possess  more  or  less  complete 
autonomy  and  which  join  in  one  way  or  another  in  the  gov- 
ernment of  the  general  body.  A  very  important  part  is 
played  by  the  local  federations  or  trades  councils,  which  bind 
together  the  local  unions  of  particular  cities. 

The  objects  of  trades  unions  in  the  United  States  are 
essentially  the  same  as  in  England.  They  pay  benefits,  as  a 
rule,  in  case  of  the  death,  sickness,  or  permanent  disability 
of  a  member.  A  few  unions,  in  whose  trades  it  is  customary 
for  the  workmen  to  furnish  their  own  tools,  insure  the  tools 
of  the  members  against  fire  and  accident.  The  out-of-work 
benefit,  however,  has  not  attained  as  much  importance  in 
America  as  in  Great  Britain. 


534  PRINCIPLES    OF    POLITICAL   ECONOMY 

The  primary  object  of  trades-union  policy  in  the  United 
States  may  perhaps  be  said  to  be  the  establishment  of  a  stand- 
ard rate  of  wages;  that  is  to  say,  a  fair  uniform  compensa- 
tion to  all  members  for  the  same  performance,  and  not  neces- 
sarily a  uniform  wage  for  each  member  by  the  day  or  by  the 
week.  Like  trades  unionists  abroad,  American  unionists 
emphasize  the  importance  of  a  shorter  work-day  and  discour- 
age overtime  work  and  work  on  Sundays  and  holidays. 

Every  labor  organization  aims  to  be  able  to  set  a  definite 
choice  before  the  non-union  men  of  its  trade:  they  may  join 
the  union  or  they  may  leave  the  occupation.  "  The  union  is 
conceived  as  a  means  of  bettering  the  condition  of  its  mem- 
bers by  united  action.  If  this  action  is  to  be  thoroughly 
effective,  it  must  be  taken  by  or  on  behalf  of  all  the  members 
of  the  craft.  It  is  by  the  establishment  of  an  absolute 
monopoly  of  labor  power  of  a  particular  kind  that  the  union 
hopes  to  raise  the  market  price  of  that  sort  of  labor  power 
and  to  ameliorate  the  conditions  under  which  it  is  sold  and 
used.  The  trades  unionist  conceives  the  members  of  his  craft 
as  a  corporate  body  whose  interests  it  is  the  duty  of  every 
member  to  further.  More  than  that,  he  conceives  the  whole 
wage-earning  class  as  a  larger  unity,  to  the  welfare  of  which 
every  member  of  it  is  in  duty  bound  to  contribute.  The  work- 
ingman  who  refuses'  to  contribute  to  the  support  of  the  union 
of  his  craft,  who  stands  aloof  and  gives  aid  and  comfort  to 
the  enemy,  is  regarded  as  a  traitor  to  his  own  trade  and  to 
the  working  class  as  a  whole.  His  mind  is  to  be  enlightened, 
if  it  can  be,  by  argument  and  persuasion ;  but  if  he  refuses 
to  be  persuaded,  any  legal  means  of  bringing  him  to  conform 
his  action  to  right  rules  are  legitimate  and  praiseworthy."1 

In  France,  the  trades  unions  (syndicats  ouvriers)  have 
600,000  members ;  in  some  industries,  —  type-setting,  engi- 
neering, and  mining,  —  they  have  formed  strong,  well- 

1  Report  of  the  Industrial  Commission,  Vol.  XVII,  p.  1.  A  defence  and 
account  of  the  American  Federation  of  Labor  may  be  found  in  H.  N.  Casson, 
"  Organized  Self-Help  "  (1901). 


STRIKES  535 

organized  federations.  In  Germany,  the  G-ewerkschaften  (as 
the  trades  unions  are  called)  are  as  a  rule  more  socialistic 
than  in  France  or  England. 

Especially  when  grouped  into  large  organizations,  trades 
unions  have  undoubtedly  increased  the  power  of  the  working 
classes.  They  have  contributed  to  the  education  of  laborers 
and  promoted  culture  and  social  intercourse  among  their 
members.  They  have  helped  to  secure  the  enactment  of 
laws  providing  for  safer,  more  hygienic  conditions  of 
employment,  shorter  hours  of  labor,  and  the  regular  cash 
payment  of  wages.  They  have  secured  better  conditions 
in  the  labor  contract,  in  several  ways :  by  helping  laborers  to 
move  to  less  crowded  labor  markets  when  the  supply  in  any 
locality  becomes  excessive ; l  by  limiting  the  number  of 
apprentices  admitted  into  each  trade  ;  by  collective  bargain- 
ing with  employers;  and  by  threatening  or  actually  resorting 
to  strikes  and  boycotts. 

§  1.    STRIKES 

A  strike  is  a  concerted  refusal  to  work.  Strikes  are  often 
regarded  as  the  sole  purpose  and  the  essential  function  of 
trades'  unions.  But,  as  we  have  already  indicated,  this  is 
a  mistake.  A  well-organized  union  may  gain  advantages 
without  striking,  just  as  a  general  may  be  victorious  without 
fighting  battled.  In  fact,  the  best  organized  and  most 
powerful  unions  are  those  that  declare  the  fewest  strikes. 
Nevertheless,  the  strike  is  the  last  resort  of  the  trades  union. 

In  most  civilized  countries  the  right  to  strike  is  not  contro- 
verted.2 For  if  we  grant  that  labor  is  a  commodity  like  any 

1  Quite  a  long  while  ago,  M.  de  Molinari  suggested  the  creation  of  labor 
exchanges,  resembling  stock  exchanges,  where  employers  and  employees  could 
find  each  other,  —  where,  in  other  words,  the  employer  could  apply  for  labor 
and  the  laborer  for  employment,  thus  giving  labor  a  mobility  almost  equal  to 
that  of  capital. 

2  There  are  weighty  reasons,  however,  for  denying  that  laborers  employed 
by  the  government,  or  those  engaged   in   occupations  of   eminent   public 
importance  (such  as  providing  illumination,  or  water,  or  railroad  transporta- 


536  PRINCIPLES   OF   POLITICAL   ECONOMY 

other  article,  every  person  has  a  right  to  refuse  to  sell  his 
commodity  if  the  purchaser  will  not  pay  the  price  that  is 
asked  for  it.  But  the  effectiveness  and  wisdom  of  strikes  is 
still  a  matter  of  discussion. 

Strikes,  being  appeals  to  force,  possess  all  the  disadvantages 
of  war.  They  entail  an  enormous  waste  of  productive 
energy.1  They  cause  great  suffering,  and  leave,  in  the  heart 
of  the  vanquished  party,  (whether  workers  or  employers)  a 
feeling  of  resentment  which  prepares  the  way  for  future 
conflicts.  But  it  cannot  be  denied  that  this  method,  radical 
as  it  is,  has  helped  to  raise  wages,  and  especially  to  reduce 
the  hours  of  labor.  We  have  already  pointed  out  what 
changes  have  taken  place  in  these  two  respects.  The  efficacy 
of  strikes  must  not  be  judged  from  the  number  that  are 
recorded  statistically  as  successful.  A  single  successful 
strike  may  result  in  an  increase  of  wages  in  a  great  many 
industries.  It  is,  moreover,  not  so  much  strikes  themselves 
which  raise  wages,  as  the  constant  fear  of  strikes. 

Those  who  deny  the  efficacy  of  strikes  as  a  means  of  in- 
creasing wages  point  out  that  wages  have  increased  quite  as 
rapidly,  or  even  more  rapidly,  in  those  trades  and  occupations 
in  which  strikes  never  occur  and  in  which  there  are  scarcely 
any  labor  organizations;  for  instance,  among  farm  laborers 
and  domestic  servants.  But  why,  let  us  ask,  is  this  true  ? 
Because  these  classes  of  laborers  have  profited  indirectly  by 
the  increase  of  wages  in  the  organized  industries.  Wages 

tion)  have  the  right  to  strike.  One  may,  moreover,  very  properly  raise  the 
question  whether  every  person  who  carries  on  a  trade  or  who  performs 
work  of  any  kind  for  others  does  not  also  perform  a  "social  function"  or 
"public  function"  in  the  true  sense  of  the  term,  and  whether,  therefore, 
to  strike  is  not  a  violation  of  the  principle  of  social  solidarity  ?  The  right 
to  strike  presupposes,  in  fact,  a  state  of  conflict  among  men,  and  would 
manifestly  be  inadmissible  under  an  ethically  superior  social  system.  - 

1  The  22,793  strikes  which  have  taken  place  in  the  United  States  in  the 
years  1881  to  1900  cost  the  employees  a  loss  in  wages  of  nearly  $260,000,000 
and  an  expenditure  of  over  $16,000,000  by  labor  organizations.  The  losses  of 
employers  amounted  to  nearly  $123,000,000.  (Sixteenth  Annual  Report  of 
the  Commissioner  of  Labor,  1901,  p.  24.) 


ARBITRATION    AND   CONCILIATION  537 

have  increased  on  the  farms  simply  because  laborers  have 
migrated  from  the  country  to  the  cities,  in  quest  of  better 
pay.  Again,  the  wages  of  domestic  servants  naturally  tend 
to  increase  whenever  the  wages  of  industrial  employees  in- 
crease. In  the  last  analysis  it  may  be  said  that  trades  unions 
are  becoming  the  regulators  of  the  labor  market,  whereas 
heretofore  the  great  army  of  unemployed  laborers  weighed 
on  the  market  and  depressed  the  price  of  labor.  From  both 
the  economic  and  the  ethical  point  of  view,  a  great  step  for- 
ward has  thus  been  taken. 

§  2.   ARBITRATION  AND  CONCILIATION 

Political  conflicts  between  nations,  which  formerly  gave 
rise  to  incessant  warfare,  are  now  more  frequently  settled 
by  arbitration.  Similarly,  conflicts  between  labor  and  capi- 
tal tend  to  be  adjusted  by  peaceful  agreements  rather  than 
by  strikes,  which  are  essentially  appeals  to  force. 

The  most  characteristic  method  for  the  peaceful  settlement 
of  labor  disputes  is  also  called  arbitration.  But  industrial 
arbitration,  in  order  to  accomplish  the  best  results,  presup- 
poses the  existence  of  strong  labor  organizations  sufficiently 
enlightened,  and  above  all  sufficiently  disciplined,  to  accept 
the  judgment  of  arbitrators  even  when  it  is  not  in  favor  of 
the  laborers.  This  is  not  usually  the  case.  In  some  of  the 
great  industries  of  England,  however,  boards  of  conciliation 
and  arbitration,  elected  by  employers  and  employees,  perform 
their  work  successfully. 

In  the  United  States  the  principle  of  conciliation  and 
arbitration  has  steadily  gained  ground.  In  half  the  states 
of  the  Union  -there  are  now  state  boards  of  arbitration  for 
the  adjustment  of  grievances  and  disputes  between  employers 
and  employees  by  conciliation  or  arbitration.  In  several  of 
the  states  these  boards  possess  some  of  the  attributes  of  ordi- 
nary law  courts,  being  empowered  to  compel  the  attendance  of 
witnesses  and  the  submission  of  relevant  testimony.1 

1  See  Vol.  V,  Report  of  the  U.  S.  Industrial  Commission,  p.  148. 


538  PRINCIPLES   OF   POLITICAL  ECONOMY 

The  formation  of  a  committee  representing  both  labor  and 
capital,  for  the  purpose  of  considering  fairly  and  dispassion- 
ately the  questions  at  issue,  is  an  eminently  rational  and  civil- 
ized method  of  settling  industrial  disputes.  Many  labor 
controversies  are  due  to  misunderstanding  and  distrust.  In 
such  cases  all  that  is  necessary  is  a  friendly  meeting  of  the 
representatives  of  employers  and  employees.  This  method, 
known  as  conciliation,  has  secured  the  amicable  settlement 
of  many  questions  that  might  have  led  to  strikes  and 
lockouts. 

When,  in  the  absence  of  efforts  at  conciliation,  or  because 
of  the  failure  of  conciliatory  boards  to  adjust  the  matters  of 
dispute,  labor  disagreements  have  led  to  an  open  rupture, 
arbitration,  i.e.  an  appeal  to  the  decision  of  an  impartial  third 
party,  has  often  proved  successful.  Sometimes  the  two 
parties  to  a  dispute  voluntarily  agree,  in  advance,  to  abide 
by  the  decisions  of  the  board  of  arbitrators.  One  of  the 
most  striking  recent  examples  of  voluntary  arbitration  was 
the  settlement  of  the  coal  strike  of  1902  by  a  board  of 
arbitrators  chosen  by  President  Roosevelt.  Arbitration, 
however,  is  not  always  voluntary.  Sometimes  the  partici- 
pants in  industrial  conflicts  involving  a  certain  number  of 
persons  are  compelled  by  law  to  submit  their  grievances  to  a 
board  of  arbitrators  having  the  power  to  enforce  obedience 
to  its  decisions.  The  most  celebrated  example  of  this 
so-called  compulsory  arbitration  is  furnished  by  New  Zealand. 
In  that  country  the  board  of  arbitration  is  not,  strictly 
speaking,  merely  a  board,  but  really  a  court  of  law.  Unlike 
ordinary  civil  tribunals,  it  may,  moreover,  of  its  own  initia- 
tive, try  and  settle  all  labor  conflicts.  This  system,  which 
has  been  in  effect  since  1894,  appears  to  work  well ;  it  has 
preserved  industrial  peace.  But  we  must  remember  that 
New  Zealand  is  a  small  country,  in  which  trades  unions  have 
long  been  powerfully  organized,  and  in  which  they  include 
the  whole  laboring  population.  Wherever  labor  organiza- 
tions are  still  in  an  embryonic  state  there  is  practically  no 


WOKKINGMEN'S  INSURANCE  539 

way  to  make  arbitration  compulsory,  or,  above  all,  to  make  it 
acceptable  to  all  parties  concerned. 

Another  device  for  securing  industrial  peace  is  the  estab- 
lishment of  sliding  scales.  As  the  result  of  an  agreement 
between  employers  and  employees,  valid  for  a  stated  period, 
the  rate  of  wages  is  determined  arithmetically  according  to 
the  selling-price  of  the  product ;  when  prices  rise,  wages  rise, 
and  vice  versa.  But  this  ingenious  device  is  applicable  only 
in  the  case  of  simple  products,  such  as  coal  and  cast-iron  ;  and 
even  in  these  cases  it  involves  troublesome  complications.1 

VII.  Workingmen's  Insurance 

For  a  workman  to  get  fair  wages  is  certainly  desirable; 
but  it  is  not  enough,  inasmuch  as  there  ought  to  be  some 
guarantee  that  his  income  will  not  be  insufficient  at  critical 
times.  Every  laborer  is  constantly  exposed  to  five  possible 
misfortunes  which  are  at  any  time  liable  to  render  him  either 
temporarily  or  permanently  unable  to  work,  and  hence  un- 
able to  earn  the  means  of  subsistence  for  himself  and  his 
family.  Three  of  them  he  shares  with  the  rest  of  mankind  : 
illness,  old  age,  and  death.  Two  of  them  are  peculiar  to  his 
economic  position :  accidents  and  loss  of  employment. 

Can  the  laborers  themselves,  by  means  of  saving  and  organ- 
ized effort,  insure  themselves  sufficiently  against  these 
threatened  dangers,  or  should  they  look  to  the  state  for  help  ? 
It  is  unlikely  that  saving,  especially  among  the  poorer  classes, 
will  be  a  sufficient  insurance  against  so  many  possible  mis- 
fortunes. 

In  fact,  the  laboring  classes  themselves  have  succeeded  in 
providing  against  only  one  of  these  risks,  —  illness  —  and 
their  success  in  this  effort  has  been  incomplete.  There  are 

1  Sometimes  agreements  are  made  between  employers'  organizations,  on 
the  one  hand,  and  trades  unions  on  the  other,  fixing  wages  at  a  mutually 
acceptable  rate  for  a  certain  period.  These  agreements  differ  from  the 
sliding  scale,  for  here  the  laborer  does  not  play  a  merely  passive  part. 


540  PRINCIPLES   OF   POLITICAL   ECONOMY 

in  most  countries  a  large  number  of  so-called  mutual  benefit 
societies,  whose  object  is  to  pay  a  regular  allowance  to  mem- 
bers whom  illness  has  rendered  for  a  time  incapable  of  work- 
ing. These  societies  are  supported  by  small  dues  and  usually 
meet  the  doctors'  and  druggists'  bills  of  sick  members. 

As  regards  the  four  other  risks,  little  or  nothing  has  been 
done  by  the  laborers  themselves.  The  annual  premium  that 
must  be  paid  to  provide  an  annuity  for  workers  who  have 
passed  the  age  of  sixty  or  seventy  years  is  still,  in  spite  of 
numerous  ingenious  financial  schemes,  much  too  high  for  the 
modest  means  of  the  average  laborer.  Many  benefit  soci- 
eties, to  be  sure,  promise  to  pay  a  pension  to  all  their  mem- 
bers who  reach  a  certain  advanced  age;  but  this  pension  is 
usually  very  small,  and  in  many  cases  it  is  doubtful  whether 
these  associations  are  in  a  position  ever  to  fulfil  their  promises. 

As  regards  death  and  accidents,  there  are  of  course  innu- 
merable insurance  companies  founded  especially  to  provide 
against  these  contingencies  ;  but  their  rates  are  high,  and 
they  make  no  effort  to  reach  the  poorer  laboring  classes. 
Outside  of  the  United  States,  comparatively  few  members  of 
the  middle  classes  insure  themselves  against  death  or  acci- 
dents, and  we  can  scarcely  expect  the  laboring  classes  to 
manifest  greater  foresight  than  their  wealthier  neighbors. 

As  regards  insurance  against  loss  of  employment,  the  Eng- 
lish trades  unions  have  accomplished  excellent  results, 
because  of  their  strong  organization  and  because  of  the  high 
dues  which  their  members  are  obliged  to  pay.  But  even  in 
England,  the  laborers  themselves  can  cope  with  this  diffi- 
culty only  when  the  loss  of  work  is  confined  to  certain  locali- 
ties or  to  certain  groups  of  laborers.  Probably  the  strongest 
and  richest  trades  union  in  the  world  would  be  ruined  in  a 
few  weeks  if  all  its  members  should  find  it  impossible  to 
secure  employment  and  should  depend  on  the  funds  of  the 
union  for  support. 

If,  therefore,  the  laborers  themselves  are  incapable  of  mak- 
ing sufficient  provision  for  meeting  the  dangers  to  which 


GERMAN   LABOR   INSURANCE  541 

they  are  exposed,  must  they  not  turn  to  others  for  help  ?  If 
so,  to  whom  shall  they  turn  ? 

What,  in  this  respect,  are  the  duties  of  the  employer? 
Especially  as  regards  the  danger  of  accidents  and  of  reach- 
ing too  advanced  an  age  for  continued  labor,  may  it  not  be 
urged  that  the  employer  is  quite  as  responsible  for  his  labor- 
ers as  for  the  machines  or  implements  that  are  worn  out  in 
his  service  ?  When  a  machine  breaks  and  becomes  temporarily 
or  permanently  unfit  for  further  use,  the  loss  falls  entirely 
on  the  employer.  Similarly,  some  employers,  especially  large 
stock  companies,  have  voluntarily  founded  insurance  funds 
to  provide  for  the  financial  relief  of  disabled  members  or  of 
those  who  have  reached  an  advanced  age  while  in  their  em- 
ploy. Sometimes  these  funds  are  furnished  entirely  by  the 
employer,  sometimes  they  are  provided  by  both  employers 
and  employees,  the  latter  being  required  to  contribute  a  cer- 
tain part  of  their  wages.  Many  American  railroad  companies, 
for  instance,  have  founded  so-called  "relief  departments"  for 
the  purpose  of  paying  regular  allowances  to  sick  or  disabled 
employees,  or  to  such  employees  as  have  reached  the  age  of 
60  or  65  years  while  in  the  company's  service.  Arrangements 
of  this  sort,  however,  are  the  exception  rather  than  the  rule. 

What,  we  may  next  ask,  are  the  duties  of  the  government 
in  this  respect  ?  The  principle  of  social  solidarity,  which  we 
have  already  explained,  requires  that  society  as  a  whole, 
which  reaps  the  advantages  of  productive  activity,  should 
also  bear  a  part  of  the  burden  which  falls  upon  the  laboring 
classes,  and  should  participate  in  the  risks  which  productive 
activity  involves. 

This  is  what  Germany  has  done.  By  the  enactment  of 
three  celebrated  laws,  —  that  of  1883  concerning  illness,  that 
of  1886  concerning  accidents,  and  that  of  1889  concerning 
old  age  and  incapacity  for  work,  —  the  expense  of  providing 
against  these  three  contingencies  must  be  borne  partly  by 
the  employers,  partly  by  the  employees,  and  partly  by  the 
government. 


542  PRINCIPLES   OF  POLITICAL   ECONOMY 

To  insure  laborers  against  illness,  the  employers  in  Ger- 
many are  required  to  pay  one-third  and  the  laborers  two- 
thirds  of  the  regular  premiums. 

For  the  payment  of  allowances  to  laborers  who  have  been 
injured,  the  German  law  requires  the  employers  to  bear  the 
total  expense.  The  theory  underlying  this  requirement  is 
that  of  so-called  "industrial  risks,"  according  to  which  acci- 
dents to  employers  constitute  one  of  the  normal,  regular 
risks  of  any  trade  or  industry  ;  the  resulting  costs  should 
therefore  form  a  part  of  the  general  expenses  of  any  business 
enterprise.1 

To  provide  for  the  payment  of  pensions  to  superannu- 
ated laborers,  half  the  premium  is  paid  by  the  employers 
and  half  by  the  laborers.  But  as  this  variety  of  insurance 
is  exceptionally  costly,  the  government  undertakes  to  bear 
part  of  the  burden  by  agreeing  to  pay  fifty  marks  ($12) 
annually  for  every  pensioned  laborer. 

This  system  of  workingmen's  insurance,  which  applies  to 
eighteen  million  laborers,  is  the  greatest  experiment  in  state 
socialism  that  has  yet  been  tried.  There  are,  however,  two 
risks  against  which  the  German  system  makes  no  provision : 
unemployment  (i.e.  inability  to  "find  work")  and  death. 

A  very  important  question  connected  with  the  insurance 
of  laborers  is  that  of  responsibility,  and  particularly  of  legal 
.  liability,  for  each  of  the  kinds  of  misfortunes  which  may  be- 
fall the  laborer.  In  the  United  States  it  is  generally  as- 
sumed, under  the  common-law  rule,  that  the  employee  engages 
in  the  services  of  an  employer  with  a  full  knowledge  of  all 
the  ordinary  risks  and  dangers  that  are  involved,  and  that 
therefore  he  cannot  charge  his  master  for  an  injury  which  he 

1  This  theory  of  industrial  risks  also  possesses  the  advantage  of  avoiding 
lengthy  discussions  and  lawsuits  in  which  each  party  endeavors  to  shift  the 
burden  of  responsibility.  In  order  to  preclude  the  possibility  of  debate  with 
regard  to  the  amount  of  indemnity  for  accidents,  the  German  law  provides 
that  so  much  shall  be  paid  for  the  loss  of  an  arm,  so  much  for  a  leg,  so  much 
for  an  eye,  etc. 


543 

suffers  as  a  result.  Hence  the  employer  is  not  responsible  in 
damages  to  an  employee  for  an  injury  incurred  through  the 
negligence  of  another  employee,  technically  known  as  a  "  f  el- 
low-servarit."  According  to  this  so-called  fellow-servant  doc- 
trine, a  brakeman  on  a  railroad  line,  for  instance,  who  has 
been  injured  through  the  carelessness  of  a  switchman,  cannot 
recover  damages  from  his  employer ;  nor  can  a  factory  worker 
who  has  lost  an  arm  because  of  the  negligence  of  an  engineer 
in  the  same  factory  obtain  redress  from  the  proprietor  or 
owners,  under  the  common-law  rule.  The  manifest  injustice 
of  this  rule  led  to  a  movement  aiming,  by  means  of  statutory 
provisions,  either  to  limit  it  or  to  do  away  with  it  entirely. 
In  the  latter  event  the  employer  is  made  liable  in  all  cases  of' 
accident,  whether  caused  by  fellow-servants  or  not,  unless 
primarily  caused  by  contributory  negligence  of  the  person 
injured.  In  some  states,  the  law  defines  who  are  fellow- 
servants  by  setting  them  off  into  classes,  or  simply  declares 
that  the  name  shall  apply  only  to  those  who  are  in  the  same 
grade  of  employment.  It  should  be  remarked,  however,  that 
there  is  no  part  of  the  labor  law  where  statutes  are  so  often 
tinkered,  and,  consequently,  no  subject  in  which  a  clear,  con- 
sistent code,  adopted  by  all  the  states,  is  more  desirable.1 

Still  another  important  question  is  whether  laborers'  insur- 
ance shall  be  obligatory  or  optional:  Shall  they  be  obliged  to 
participate,  or  shall  the  matter  be  left  to  their  own  choice? 
The  German  system  is  obligatory ;  employers  and  employees 
are  by  law  compelled  to  pay  the  prescribed  amounts  into  treas- 
uries established  for  this  purpose  in  the  various  groups  of 
industries  and  in  the  several  regions  of  the  empire.2  In  order 

1  In  many  states  these  statutes  concerning  employers'  liability  apply  only 
in  the  case  of  railways.     Several  states  have,  by  statute,  made  employers 
liable  for  injury  to  employees  caused  by  defects  and  condition  of  appliances, 
machinery,  etc. 

2  These  treasuries  sometimes  accumulate  very  large  sums  of  money,  which 
they  are  required  to  invest.     Frequently  the  funds  are  used  to  build  or  man- 
age sanatoriums  ;  as  the  sick  laborers  are  sometimes  kept  in  these  institu- 
tions, their  care  involves  comparatively  little  expense. 


544  PRINCIPLES   OF  POLITICAL  ECONOMY 

to  prevent  any  failure  on  the  part  of  employees  to  make  the 
prescribed  payments,  the  employer  is  required  to  pay  the 
premiums  and  to  deduct  the  laborer's  share  from  the  latter's 
wages. 

In  most  countries,  workingmen's  insurance  is  entirely  op- 
tional, the  law  attempting  nothing  more  than  to  fix  the 
liability  of  employers  and  employees,  who  may  take  what- 
ever precautionary  measures  they  choose. 

In  France,  according  to  the  Civil  Code,  the  employer  was 
strictly  responsible  for  accidents  to  employees  only  when  the 
latter  could  bring  proof  that  the  former  was  to  blame.  This 
provision  made  the  employer's  liability  almost  illusory,  for 
•  accident  statistics  in  Germany  show  that  of  every  100  acci- 
dents to  laborers,  the  laborer  is  to  blame  for  26,  the  employer 
for  20,  both  of  them  for  4,  and  50  are  due  to  purely  accidental 
circumstances.  The  French  law  of  1898,  however,  which  re- 
sembles the  German  law,  makes  employers  responsible  for  all 
accidents.  With  regard  to  illness  and  old  age,  French  law 
has  left  the  laborers  to  take  care  of  themselves,  except  for  a 
few  favors  granted  to  mutual  societies  which  pay  benefits  to 
members  in  cases  of  illness  and  old  age.  It  can  scarcely  be 
held  that  old  age  should  be  regarded  as  an  "  industrial  risk  "; 
but  it  may  be  maintained  that  the  laborer's  wages  should  in- 
clude, in  addition  to  the  amount  necessary  for  living,  sufficient 
surplus  to  provide  for  the  years  in  which  he  is  no  longer  able 
to  work. 

Which  of  these  two  systems  is  preferable  ?  The  plan  of 
optional  insurance,  evidently,  is  not  only  in  better  harmony 
with  the  principles  of  liberalism,  but  less  vexatious  and  less 
burdensome.  The  obligatory  system  involves  innumerable 
devices  for  collecting  dues,  keeping  accounts,  the  issue 
of  receipts,  etc.  Not  all  people  are  disposed  to  look 
favorably  upon  the  vast  amount  of  "  red  tape "  connected 
with  the  German  system.  But,  on  the  other  hand,  it  is  to 
be.  feared,  --in  view  of  the  widespread  improvidence 
of  mankind,  a.nd  especially  that  of  the  poorer  classes,— 


INSURANCE   AGAINST   UNEMPLOYMENT  545 

that  optional  insurance  will  cover  only  a  small  part  of  the 
population. 

Governments  may  adopt  a  mixed  system,  retaining  the 
general  principle  of  optional  insurance,  but  encouraging  its 
extension  by  furnishing  financial  assistance.  This  has  been 
done  in  Belgium.  The  government  says  to  the  laborer,  vir- 
tually :  "  Help  yourself  and  I  will  help  you."  This  arrange- 
ment is  a  good  one,  but  under  it  there  will  always  be  a  host 
of  incorrigible  improvidents ;  it  should  consequently  be  sup- 
plemented by  some  legal  provision  for  the  relief  of  laborers 
who  have  reached  an  advanced  age  incapacitating  them  for 
work. 

We  have  seen  that  the  German  system  provides  insurance 
against  three  risks  only,  but  not  against  death  and  loss  of 
employment.  It  was  originally  the  intention  of  the  German 
government,  however,  to  provide  also  for  laborers'  insurance 
against  death, — a  calamity  which  often  plunges  the  working- 
man's  family  into  extreme  want.  But  with  regard  to  insur- 
ance against  loss  of  employment,  or  the  inability  to  "find 
work,"  the  difficulties  are  really  so  great  as  to  be  insur- 
mountable. Nothing  is  harder  than  to  find  out  whether  the 
laborer  who  claims  to  be  unable  to  find  employment  is 
truthful  and  sincere.  Unlike  the  other  misfortunes  to  which 
the  laborer  is  exposed,  the  inability  to  find  work  cannot  be 
established  conclusively.  Unlike  the  others,  this  misfortune 
is  not  usually  confined  to  individual,  isolated  cases,  but  gen- 
erally involves  large  groups  of  laborers  simultaneously,  —  all 
the  employees  of  an  establishment,  or  an  entire  trade,  or 
even  the  whole  industry  of  a  nation.1 

For  a  long  while  it  was  believed  that  the  state  could  come 
to  the  assistance  of  unemployed  laborers  by  recognizing  the 

1  The  local  governments  of  several  Swiss  and  German  towns  have  founded 
societies  for  insurance  against  loss  of  work,  the  membership  of  which  is  vol- 
untary; and  the  Swiss  town  St.  Gall  has  a  society  of  this  kind  with  obligatory 
membership. 

These  experiments,  however,  have  not  been  satisfactory,  but  other  Swiss 
towns  are  about  to  try  new  experiments  along  this  line. 


546  PRINCIPLES    OF   POLITICAL   ECONOMY 

so-called  right  to  work.  This  "right,"  which  gave  rise  to 
considerable  discussion  during  the  French  Revolution  of 
1848,  is  now  somewhat  discredited.  It  is  now  understood 
that  the  state  cannot  undertake  to  provide  every  laborer 
with  the  kind  of  work  he  can  perform,  nor  guarantee  that 
his  labor  shall  be  productive,  unless  the  government  becomes 
the  entrepreneur  of  all  businesses  and  thus  accepts  collectiv- 
ism. It  is  generally  agreed  at  the  present  time  that  the 
so-called  right  to  work  cannot  really  be  anything  more  or 
less  than  a  form  of  public  charity. 

VIII.  The  Future  of  the  Wage  System 

In  spite  of  the  influences  which  tend  naturally  to  increase 
wages,  and  in  spite  of  the  ever  more  active  intervention  of 
legislative  bodies  with  a  view  to  improving  the  condition  of 
wage-earners,  the  wage  system  will  always  have  certain  seri- 
ous defects  that  cannot  be  overcome,  because  they  are  inher- 
ent in  the  system  itself. 

Without  doubt,  the  wage  system  offers  some  advantages 
that  political  economists  have  been  careful  to  point  out.1  The 
following  are  the  two  principal  advantages  that  are  attributed 
to  it  :  — 

(a)  To  the  entrepreneur  it  secures  not  only  the  owner- 
ship of  the  product,  but  also  the  entire  control  and  responsi- 
bility of  the  business  enterprise.  (5)  To  the  laborer  it 
guarantees  a  certain,  fixed,  and  immediate  income,  an  income 
that  does  not  depend  on  the  success  or  failure  of  the  busi- 
ness enterprise  in  which  he  is  employed. 

These  two  advantages  are  so  pronounced  that  the  wage- 

1  It  must  not  be  supposed,  however,  that  this  method  of  remuneration  was 
devised  and  adopted  because  of  these  advantages.  The  wage  system  is  simply 
the  result  of  historical  necessity,  —  the  outcome  of  social  forces.  Yet  M.  de 
Molinari  appears  to  regard  the  wage  system  as  a  wonderful  discovery,  like 
that  of  vaccination  or  that  of  the  locomotive,  when  he  declares,  "  The  wage 
system  was  invented  because  it  is  impossible  for  laborers  to  await  the  result 
of  productive  activity,  and  to  incur  the  risks  which  it  involves." 


DISADVANTAGES   OF   THE  WAGE  SYSTEM  547 

workers  themselves,  as  well  as  the  entrepreneurs,  generally 
prefer  this  system  to  all  others,  —  even  to  the  apparently 
more  equitable  plan  of  quasi-partnership,  by  which  laborers 
and  employers  would  share  the  profits  and  losses. 

Such  a  system  of  partnership  presupposes  an  equality  of 
economic  position  and  a* community  of  interests  and  purposes, 
which  do  not  really  exist.  Capitalists  and  proletarians  — 
those  that  possess  much  and  those  that  possess  little  or  noth- 
ing—  are  by  no  means  on  a  footing  of  equality.  The  former 
aim  to  amass  wealth ;  the  latter  try  to  earn  a  living.  The 
former  look  far  ahead  ;  the  latter  live  from  day  to  day.  The 
former  act  on  the  principle,  "  Nothing  risk,  nothing  gain  "  ; 
the  latter  have  nothing  to  lose,  and  therefore  nothing  to  risk. 
Later,  when  we  discuss  profit-sharing,  we  shall  see  in  what 
measure  these  difficulties  can  be  removed. 

The  following  disadvantages  of  the  wage  system  far  out- 
weigh, in  our  opinion,  its  advantages  :  — 

(1)  This  method  of  remuneration  treats  labor — that  is  to 
say  the  laborer,  for  it  is  impossible  to  separate  the  one  from 
the  other — as  a  commodity,  and  regards  it  as  subject,  in  the 
market,  to  all  the  laws  that  determine  the  value  of  commodi- 
ties. Now  these  laws  are  natural  laws,  and  have  nothing 
to  do  with  moral  considerations.  Hence  it  has  been  said  — 
Chateaubriand  was  the  first  to  say  it  —  that  the  wage  sys- 
tem is  a  survival  of  the  slave  system  and  the  slave  trade, 
which  also  treated  men  as  objects  to  be  bought  and  sold. 

It  may  be  asked  whether  the  same  is  not  true  of  land- 
owners and  capitalists.  Is  not  their  income,  whether  it  be 
rent  or  interest,  also  determined  by  the  law  of  supply  and 
demand  ?  To  be  sure.  But  landowners  and  capitalists  put 
only  their  possessions  on  the  market,  not  themselves.  Now 
the  man  who  sells  his  labor  or  hires  himself  for  money  is 
generally  at  a  great  disadvantage  when  compared  with  the 
man  who  exchanges  a  commodity  for  money.1 

1  Ruskin  frequently  points  out  that  the  remuneration  of  professional  men 
—  lawyers,  physicians,  professors,  artists,  etc.  —  is  not  determined  by  the 


548  PRINCIPLES   OF   POLITICAL   ECONOMY 

(2)  By  the  terms  of  the  wage  contract,  the  laborer  gives 
up  all  claim  to  the  product  of  his  labor,  in  consideration  of  a 
fixed  sum  which  the  entrepreneur  agrees  to  pay  him  per 
week  or  per  month.1 

As  a  general  rule,  the  great  majority  of  laborers  are  de- 
prived of  all  claim  to  the  product  of  their  toil.  This  is  an 
unnatural  and  unjust  state  of  affairs.  It  is,  moreover,  dan- 
gerous in  its  effects  on  the  intensity  and  quality  of  labor,  for 
the  worker  has  no  incentive  to  do  his  best.  The  only  motives 
that  can  lead  him  to  work  well  are  duty  and  fear,  —  not  the 
fear  of  physical  punishment,  which  prompted  the  slave  to 
work,  but  the  fear  of  being  discharged  and  thus  losing  the 
means  of  living.  Of  these  two  motives,  the  first  is  felt 
with  sufficient  keenness  only  by  exceptional  minds;  it  is, 
unfortunately,  constantly  being  weakened  by  the  increasing 
antagonism  of  employers  and  employees.  The  second  motive, 

law  of  demand  and  supply,  but  by  social  custom.  He  proposes  that  manual 
labor  be  remunerated  in  the  same  manner  as  intellectual  labor. 

1  The  nature  of  the  wage  contract  might  be  different  if  we  could  determine 
a  priori  the  share  due  to  each  participant  in  the  productive  process.  The 
problem  to  be  solved  is  this :  Given  two  factors,  one  of  which  is  manual  labor 
alone,  and  the  other  capital  alone,  both  of  which  cooperate  in  a  productive 
enterprise.  What  part  of  the  product  ought,  theoretically,  to  belong  to  each  ? 

Robinson  Crusoe,  for  example,  provides  a  canoe  and  a  fishing-net,  while 
Friday  furnishes  his  labor.  As  the  result  of  the  day's  work,  Friday  brings 
home  ten  baskets  of  fish.  How  many  ought  Crusoe  (capital)  to  receive,  and 
how  many  ought  to  be  given  to  Friday  (labor)  ? 

This  problem  is  impossible  to  solve  —  as  impossible  as  that  proposed  by 
John  Stuart  Mill  when  he  asks,  ironically,  which  of  the  two  blades  of  a  scis- 
sors does  the  more  cutting.  Yet  a  great  many  economists  have  grappled  with 
it.  The  German  economist,  Von  Thuenen,  in  a  very  remarkable  book  on 
"  Natural  Wages,"  attempted  to  prove,  with  the  aid  of  mathematics,  that  the 
wages  of  labor  should  be  the  geometrical  mean  of  two  factors,  the  first  of 
which  is  the  minimum  cost  of  supporting  the  laborer,  and  the  second  the 
value  of  his  product.  Let  the  first  factor  be  called  a,  and  the  second  p,  and 
we  obtain  the  formula :  wages  =  Va  p.  This  so-called  formula  of  natural 
wages,  however,  indicates  what  wages  the  laborer  ought  to  receive,  and  is  not 
supposed  to  explain  how  wages  are  actually  determined.  Wages  are  in  real- 
ity determined,  in  Thuenen's  opinion,  by  the  productivity  of  the  least  pro- 
ductive laborer.  (See  page  506  ff.) 


PIECE    WAGES  549 

of  the  effects  of  which  the  slave  system  offered  an  excellent 
illustration,  has  never  succeeded  in  getting  men  to  do  more 
than  the  least  possible  amount  of  work.1 

To  overcome  this  disadvantage  in  a  certain  measure,  there 
is  now  a  tendency  to  adopt  the  system  of  piece  wages,  by 
which  the  laborer  is  not  paid  a  fixed  sum  per  hour  or  day  or 
week,  but  according  to  the  quantity  of  goods  he  produces. 
Laborers  are  generally  opposed  to  this  method  of  remunera- 
tion, which  they  regard  as  a  device  for  getting  more  work 
out  of  them  without  ultimately  increasing  their  wages.2 

Laborers  have  often  advocated  the  system  under  which  a 
group  of  employees  agree  to  perform  a  certain  task  or  "job" 
at  a  price  fixed  upon  with  their  employer.  The  employees 
then  do  the  work  and  share  the  proceeds  according  to  rules 
which  they  have  adopted  themselves.  They  constitute  a 
sort  of  small  cooperative  association  in  the  midst  of  the 
factory  or  industrial  plant.  (Consult  the  section  on  co- 
operative societies  for  production.) 

(3)  This  system,  finally,  is  sure  to  create  strife  between 

1  In  manufacturing,  the  productive  inferiority  of  wage-paid  labor  is  less 
manifest  than  in  other  branches,  because  labor  in  manufactories  can  be  sub- 
jected to  close  supervision,  its  results  are  directly  measurable,  and  a  certain 
amount  of  work  must  be  done  in  a  given  time. 

The  inferiority  of  wage-paid  labor  is  especially  noticeable  in  agriculture, 
and  due  to  the  following  circumstances :  (1)  Supervision  is  much  more  diffi- 
cult than  in  a  workshop,  and  increases  in  difficulty  with  the  size  of  the  farm; 
(2)  the  results  of  a  farmer's  labor  generally  cannot  be  found  out  until  a  long 
time  afterward,  and  even  then  not  exactly  ;  (3)  the  plan  of  requiring  a  cer- 
tain amount  of  work  in  a  given  time  cannot  ordinarily  be  used,  because 
in  farming  the  carefulness  and  quality  of  the  work  is  more  important  than 
its  rapidity. 

2  Piece  wages  have  often  been  introduced  by  employers  as  a  means  of  get- 
ting employees  to  do  more  work,  and  then  the  rate  of  wages  per  piece  has 
been  reduced ;   so  that  the  ultimate  result  is  the  employer's  gain  and  the 
employee's  loss.     The  actual  practice  of  labor  organizations,  however,  would 
hardly  support  the  widely  prevalent  belief  that  the  policy  of  trades  unions  in 
general  is  antagonistic  to  piece-work  wages.     (See  "  Report  of  the  Industrial 
Commission,"  Vol.  XVII,  page  54.)     Sometimes  piece  wages  and  time  wages 
are  combined  by  guaranteeing  a  minimum  time  wage  and  offering  a  pre- 
mium for  exceeding  a  certain  amount  of  work  per  hour  or  day. 


550  PRINCIPLES   OF   POLITICAL   ECONOMY 

master  and  workman,  because  their  interests  are  antagonistic 
when  the  product  is  divided.  It  is  natural,  moreover,  for 
the  laborer  to  regard  it  as  his  interest  to  furnish  the  least 
labor  possible  in  exchange  for  the  wages  he  receives ;  while 
the  employer,  on  the  other  hand,  tries  to  get  the  most  labor 
in  exchange  for  least  wages  possible.  Hence  the  series  of 
conflicts  which,  in  the  form  of  strikes,  for  several  years  have 
occupied  the  public  attention. 

Each  great  school  of  economists  has  its  own  particular 
plan  for  the  reform  or  abolition  of  the  wage  system. 

The  liberal  school,  as  we  have  already  said,  regards  wages 
as  the  most  perfect  conceivable  system  of  remuneration, 
because  wages  are  the  result  of  "  free  contract."  This  school 
therefore  accepts  the  wage  system  as  a  permanently  estab- 
lished institution.  The  only  improvement  which  it  advo- 
cates is  to  make  the  labor  contract  still  more  free.  This 
may  be  accomplished  either  through  the  exercise  of  the  right 
of  laborers  to  organize,  —  a  right  which  liberal  economists 
have  always  admitted,  —  or  by  means  of  such  institutions  as 
labor  exchanges  (page  535,  note  1),  which  enable  workers  to 
find  the  most  remunerative  employment,  and  make  traffic  in 
labor  more  nearly  like  traffic  in  merchandise. 

The  collectivists  demand  the  abolition  of  the  wage  system, 
which  they  regard  as  the  latest  form  of  slavery.  In  their 
party  programmes  they  insist  that  the  laborer  has  "  a  right 
to  the  full  product  of  his  toil."  But  we  believe  that,  far 
from  abolishing  the  wage  system,  collectivism  would  only 
perpetuate  it  and  make  it  universal.  This,  in  fact,  is  another 
objection  against  collectivism,  which  should  be  added  to 
those  already  urged.  (See  pages  472  ff.)  We  already  know 
that  collectivists  propose  to  make  the  nation  the  only  entrepre- 
neur, and  to  suppress  all  individual  enterprise.  Consequently, 
no  one  would  work  for  himself,  but  each  citizen  would  be 
employed  by  the  nation,  and  receive  a  share  of  the  produc- 
tive proceeds  equivalent  to  the  amount  of  labor  he  had  fur- 
nished. If  this  is  not  the  wage  system,  one  must  admit  that 


FAIR   WAGES  551 

it  resembles  the  wage  system  very  closely  indeed.  Collectiv- 
ism, as  a  matter  of  fact,  would  not  suppress  the  class  of 
wage-workers  (for  under  that  social  system  we  should  all  be 
wage-workers) ;  but  it  would  do  away  with  the  class  of  em- 
ployers, because  the  nation  would  then  be  the  only  employer. 

The  Catholic  school  accepts  the  wage  system  as  a  normal 
and  permanent  condition.  This  is  logical,  because  the  con- 
tinuance of  the  two  classes  of  employers  and  employees  is  a 
fundamental  part  of  the  programme  of  Catholic  reformers. 
But  they  protest  against  the  treatment  of  labor  as  a  com- 
modity, and  do  not  desire  to  have  wages  determined  by  the 
law  of  supply  and  demand.  They  maintain  that  the  laborer 
has  a  right  to  fair  wages,  that  is  to  say,  sufficient  wages  to 
enable  him  and  his  family  to  live  under  conditions  that  are 
decent  and  worthy  of  a  creature  of  God,  entitled  above  all  to 
his  daily  bread,  but  who  "  does  not  live  by  bread  alone." 1 

But  who  shall  determine  what  is  the  proper  and  sufficient 
standard  of  living  in  a  given  community  ?  The  employer  ? 
Even  if  the  employer  is  an  exceptionally  enlightened  and 
unselfish  man,  there  will  thus  be  no  effectual  guarantee  that 

1  This  is  the  same  as  the  popular  idea  that  the  workman  should  receive 
a  "  living  wage,"  i.e.  wages  sufficient  to  enable  him  to  meet  fairly  and 
fully  the  physical,  mental,  and  moral  requirements  and  conditions  of  life, 
individual  and  social.  This  idea,  however,  is  singularly  vague,  for  whereas 
the  London  County  Council  estimated  thd  "living  wage"  at  24  shillings  a 
week  ($6),  the  socialist,  Keir  Hardie,  fixes  it  at  £3  a  week  ($15). 

Concerning  the  saying  that ' '  a  man  should  have  a  fair  day's  wages  for  a  fair 
day's  work,"  Professor  Jevons  remarks:  "  Nothing,  at  first  sight,  can  seem 
more  reasonable  and  just ;  but  whe.n  you  examine  its  meaning,  you  soon  find 
that  there  is  no  real  meaning  at  all.  It  amounts  merely  to  saying,  that  a  man 
ought  to  have  what  he  ought  to  have.  There  is  no  way  of  deciding  what  is 
a  fair  day's  wages.  ...  If  the  saying  means  that  all  should  receive  the  same 
fair  wages,  then  all  the  different  characters  and  powers  of  men  would  first  have 
to  be  made  the  same,  and  exactly  equalized.  .  .  .  Wages  vary  according  to 
the  laws  of  supply  and  demand,  and  as  long  as  workmen  differ  in  skill,  and 
strength,  and  the  kind  of  goods  they  can  produce,  there  must  be  differences 
of  demand  for  their  products.  Accordingly  there  is  no  more  a  fair  rate  of 
wages  than  there  is  a  fair  price  of  cotton  or  iron."  ("  Primer  of  Political 
Economy,"  page  60.) 


552  PRINCIPLES    OF    POLITICAL   ECONOMY 

wages  are  fair  and  sufficient.  Hence  Catholic  reformers 
usually  accept  the  idea  that  the  "  fair  wage  "  must  be  fixed 
by  law.  But  from  the  purely  theoretical  point  of  view 
which  concerns  us  here,  a  standard  of  wages  established  by 
law  must  be  regarded  as  unjust,  because  it  necessarily 
implies  that  at  a  fixed  figure  wages  shall  be  regarded  as  fair.1 
Why,  moreover,  should  there  not  also  be  a  "fair"  income  for 
the  landowner  and  the  capitalist ;  that  is  to  say,  an  income 
fixed  at  a  certain  level  ?  There  is  no  reason  whatever  for 
fixing  the  share  of  the  laborer,  and  at  the  same  time  regard- 
ing the  share  of  the  other  participants  as  unlimited.  Must 
the  laborer  be  satisfied  with  only  a  modest  competence  ? 
He  has  more  right,  or  at  least  as  much  right  as  the  others, 
to  participate  in  all  the  fruits  of  a  progressive  civilization, 
even  though  they  be  matters  of  luxury. 

The  cooperative  school,  lastly,  regards  the,  wage  system  as 
a  relatively  inferior  method  of  remuneration,  destined  to  be 
gradually  supplanted  by  association  or  co-partnership.  Co- 
operators  expect  that  some  day  the  laborers  will  be  united  in 
cooperative  societies  owning  the  instruments  of  production ; 
that  the  laborers  will  receive  the  entire  product  of  their  work; 
and  that  thus  they  will  cease  to  be  employees  and  will  become 
their  own  masters.  Meanwhile,  as  long  as  the  wage  system 
and  its  necessary  complement,  the  entrepreneur  system,  con- 
tinue to  be  necessary,  this  school  endeavors  to  graft  upon  the 
wage  system  the  arrangement  known  as  profit-sharing.  Under 
this  arrangement,  proposed  as  a  partial  corrective  of  the 
defects  of  the  wage  system,  the  laborer  receives,  in  addition 
to  his  wages  (which  continue  to  be  determined  by  the  law  of 
demand  and  supply),  a  share  in  the  profits  of  the  business. 
We  shall  examine  this  arrangement  more  closely  under  the 
head  of  Profits. 

1  Some  European  municipalities  have  begun  to  establish  a  minimum  wage 
for  laborers  employed  by  contractors  engaged  in  work  for  the  municipality. 
But  it  is  difficult  to  conceive  the  possibility  of  a  legal  minimum  wage  for 
purely  private  enterprises,  because  employers  are  always  at  liberty  not  to 
employ  laborers. 


CHAPTER   II  — INTEREST 
I.   The  Ownership  of  Capital 

THE  existence  of  a  particular  kind  of  income  that  goes  to 
the  capitalist  evidently  presupposes  that  capital  belongs  to 
some  one,  and  consequently  gives  rise  first  of  all  to  the  ques- 
tion whether  private  property  in  capital  should  be  regarded 
as  legitimate.  The  classical  economists  have  answered  this 
question  decidedly  in  the  affirmative.  In  the  case  of  land, 
on  the  contrary,  we  shall  see  that  important  reserves  are 
made,  and  its  private  ownership  is  usually  defended  only  on 
grounds  of  public  utility.  But  the  embarrassing  circum- 
stance that  land  is  not  a  product  of  labor  is  not  present  in 
the  case  of  capital.  There  is  no  doubt  that  all  capital,  no 
matter  what  definition  of  it  we  may  give,  and  no  matter  what 
form  it  may  take,  is  a  product  of  labor,  and,  as  such,  may 
properly  become  an  object  of  private  property. 

The  classical  economists  maintain  that  the  right  of  private 
property  in  capital  is  even  less  subject  to  attack  than  the 
ownership  of  other  products,  because  it  is  based  on  a  twofold 
claim ;  it  is  not  only  due  to  the  labor  of  production,  but  also 
to  that  of  saving,  which  in  the  creation  of  capital  is  quite  as 
indispensable  as  production.  The  right  of  the  farmer  to 
the  wheat  that  he  has  harvested  is  sacred ;  his  right  to  the 
same  wheat  when  it  has  been  withdrawn  from  purposes  of 
consumption  and  kept  in  reserve  for  sowing,  —  that  is  to 
say,  when  it  is  transformed  into  capital,  —  ought  to  be 
doubly  sacred. 

This  second  argument  seems  to  us  of  doubtful  validity. 
See  what  we  have  said  concerning  saving  or  abstinence, 

553 


554  PRINCIPLES   OF   POLITICAL   ECONOMY 

page  129.)  It  is  at  all  events  superfluous;  the  first  alone 
is  sufficient. 

The  legitimacy  of  property  in  capital  has  nevertheless  been 
vigorously  attacked  by  socialists.  The  principal  purpose  of 
Karl  Marx's 1  celebrated  book  on  "  Capital "  is  to  prove 
that  private  property  in  capital  is  both  the  result  of  past 
spoliation  and  a  means  of  continuing  this  spoliation  upon 
a  larger  and  larger  scale.  Collectivists  consider  private 
property  in  capital  as  legitimate  only  when  it  exists  in  the 
modest  and  primitive  forms  usually  referred  to  by  political 
economists,  e.g.  Robinson  Crusoe's  canoe,  the  plane  made  by 
Bastiat's  carpenter,  the  coins  put  away  in  an  old  stocking  or 
deposited  in  the  savings-bank  by  a  peasant.  But,  they  main- 
tain, this  is  not  true  capital;  this  is  not  the  capital  that  pro- 
cures wealth  and  power  without  exertion.  True  capital  is 
never  the  product  of  the  owner's  labor,  or  saved  from  the  pro- 
ceeds of  the  owner's  labor.  It  is,  on  the  contrary,  saved  from 
the  product  of  the  labor  of  others,  these  others  being  hired  wage- 
workers.  This  saving,  moreover,  can  be  increased  only  by 
using  it  to  employ  the  labor  of  still  more  wage-workers  in 
order  to  produce  additional  profits.  All  great  fortunes  have 
been  created  by  this  process  of  cumulative  spoliation.2 

The  only  conclusion  to  be  drawn  from  this  argument  is 
that  there  are  two  kinds,  two  classes,  of  capital:  '> small" 
capital,  —  the  private  ownership  of  which  is  legitimate 
because  it  is  the  result  of  the  owner's  labor ;  and  "  large  " 
capital,  —  private  property  in  which  it  is  illegitimate  because 

1  Rodbertus  preceded  Marx  in  many  points,  as  his  most  important  works 
were  written  half  a  century  ago.     Almost  totally  ignored  for  a  long  time, 
Rodbertus  has  recently  acquired  considerable  celebrity  as  a  forerunner  of  the 
great  collectivist  doctrines.     An  excellent  account  of  his  work  may  be  found 
in  W.  H.  Dawson,  "  Socialism  and  Ferdinand  Lassalle,"  and  Charles  Andler, 
"Les  Origines  du  Socialisme  d'Etat  en  Allemagne." 

2  It  is  also  often  said  that  true  productive  capital  consists  of  workshops  and 
factories,  machinery,  utilizable  natural  forces,  mines,  and  raw  materials.     All 
these  things  are  the  result  of  the  labor  of  many  persons,  of  inventions,  trials, 
and  experiments,  carried  on  during  many  centuries  by  millions  of  men.    No 
one  would  pretend  to  be  the  owner  of  the  steam-engine,  not  even  James  Watt, 


THE   OWNERSHIP   OF   CAPITAL  555 

it  involves  the  appropriation  of  the  product  of  others'  labor. 
Now,  as  all  "  large  "  capital  evidently  must  have  been  "  small " 
at  one  time,  it  would  follow  that  the  private  ownership  of 
capital  is  legitimate  at  the  outset,  continues  to  be  so  up  to  a 
certain  point  in  its  growth  difficult  to  determine,  and  then 
becomes  an  abuse. 

We  object  to  the  assertion  that  capital,  by  its  very  nature, 
can  be  increased  only  by  plundering  the  workingman.  We 
believe  that  this  is  a  perversion  of  its  nature  (although  it 
doubtless  does  take  place  frequently),  and  that  we  can  and 
should  try  to  prevent  it.  At  all  events,  we  are  not  called 
upon  to  justify  the  private  ownership  of  vampiric  capital, 
but  of  that  capital  which,  as  we  have  denned  it,  is  the  result 
of  individual  labor  or  saving.  Even  in  the  light  of  what  is 
said  above,  this  ownership  is  justifiable.  It  is,  moreover, 
dictated  by  social  utility.  As  the  development  of  production 
absolutely  requires  a  supply  of  accumulated  wealth  (see  page 
120),  one  must  admit  that  those  who  accumulate  wealth  and 
thus  create  capital  perform  a  function  of  very  great  social 
importance  ;  and  certainly  the  most  effectual  method  of 
encouraging  this  accumulation  of  wealth  for  productive  pur7 
poses  is  to  attribute  the  property  of  that  wealth  to  those 
who,  by  not  consuming  it,  have  created  capital. 

The  problem  of  private  property  in  capital  once  settled, 
there  are  still  two  others  to  be  solved :  — 

Has  the  owner  of  capital  the  right  to  use  it  to  set  others 
to  work,  making  a  profit  thereby  ?  This  question  we  shall 
study  in  the  following  section  (pages  558  ff.)  and  in  the 
chapter  on  Profits. 

who  invented  it.    Why,  then,  are  steam-engines  owned  by  individuals  who 
grow  rich  by  their  use  ? 

This  is  a  popular  argument  entirely  devoid  of  sense.  No  capitalist  pre- 
tends to  own  a  force  of  nature  (aside  from  certain  reserves  to  be  discussed 
under  the  head  of  land -rent),  or  the  steam-engine  in  genere  ;  for  these  would 
be  of  inestimable  value.  He  simply  claims  to  be  the  owner  of  the  value  of 
the  machines  in  his  possession,  this  value  representing  what  it  cost  him  to 
have  them  built. 


556  PRINCIPLES    OF   POLITICAL   ECONOMY 

Has  the  owner  of  capital  the  right  to  lend  it  to  others  on 
condition  that  they  pay  him  interest  for  its  use  ?  This  ques- 
tion we  shall  answer  first. 


II.   The  Legitimacy  of  Interest 

Of  all  kinds  of  income  the  legitimacy  of  which  has  been 
called  into  question,  none  has  been  more  violently  contested 
than  that  which  is  due  to  the  loan  of  capital  and  is  called 
interest.  For  over  two  thousand  years  this  problem  has 
given  rise  to  vehement  and  unceasing  polemic. 

The  following  are  the  principal  points  that  have  been 
raised  during  this  controversy  :  — 

(1)  It   was    asserted,   by    Aristotle    among    others,   that 
money  is  unproductive:  one  coin  has  never  given  birth  to 
another  coin. 

To  this,  economists  reply  that  money  only  represents  capi- 
tal, which  is  productive  both  by  its  nature  and  according  to 
its  definition.  With  money,  as  Bentham  observed,  one  can 
buy  sheep,  and  sheep  give  birth  to  sheep. 

(2)  It  was  asserted  that  in  loaning   money  the   lender 
undergoes   no  genuine  privation   and   consequently  has   no 
right  to  an  indemnity  in  the  shape  of  interest. 

In  answer  to  this,  economists  endeavor  to  prove  that  the 
capitalist  must  deprive  himself  in  order  to  create  capital; 
some  have  even  declared,  with  Senior,  that  abstinence  is 
the  sole  source  of  capital. 

(3)  It  was  asserted  that  the  perpetuity  of  interest  is  un- 
natural and  unjust.     At  the  rate  of  five  per  cent  (and  with- 
out reckoning  compound  interest)  the  lender  will  recover  his 
entire  loan  in  twenty  years,  in  the  guise  of  annual  interest- 
payments.     In  forty  years,  he  will  collect  the  original  sum 
twice  over,  and  in  a  century,  five  times  ;  nevertheless,  he  still 
retains  his  right  to  the  entire  reimbursement  of  the  loan ! 

To  this  it  is  answered  that  the  regular  payment  of  inter- 
est is  by  no  means  the  same  thing  as  the  gradual  restitu- 


THE   LEGITIMACY    OF   INTEREST  557 

tion  of  the  loan,  any  more  than  the  annual  rent  of  a  farm  is 
part  of  the  purchase-price  of  the  land.  Payment  for  the  use 
of  a  thing,  and  the  return  of  the  thing  itself  or  an  equivalent 
for  it,  are  two  distinct  and  different  operations.  Interest, 
like  the  rent  of  a  farm,  is  the  payment  for  the  use  of  wealth 
that  is  perpetual,  or,  at  least,  wealth  that  can  be  made  per- 
petual by  constant  renewal.  And  if  the  use  that  one  can 
make  of  a  thing  is  perpetual,  why  should  not  the  price  paid 
for  its  use  be  also  perpetual  ? l 

(4)  It  was  asserted  that  the  borrower  is  obliged  to  pay 
back  more  than  he  has  received. 

This  the  economist  denies.  For  if  I  give  you  a  dinner 
to-day,  in  exchange  for  a  dinner  just  like  it  which  you  will 
give  me  a  hundred  years  hence,  I  am  giving  you  much 
more  than  I  receive,  and  you  are  getting  decidedly  the 
better  of  the  bargain.  Why  ?  Because  a  dinner  a  hundred 
years  hence  is  not  worth  as  much  as  a  dinner  now.  For  the 
same  reason,  if  I  give  you  $100  to-day  in  exchange  for  $100 
which  you  will  give  me  a  century  later,  the  transaction  is 
unfair.  Even  if  you  paid  back  the  money  a  year  later,  your 
payment  would  not  be  equitable.  For  me,  as  for  everybody 
else,  the  future  is  not  as  good  as  the  present ;  and  precisely 
in  order  to  equalize  matters,  it  is  agreed  that  I  shall  now 
give  you  $100  in  exchange  for  $105  which  you  will  give  me 
a  year  later.  This  difference  of  $5  indicates  the  difference 
of  value  between  the  present  and  the  future,  and  measures 
the  superiority  of  present  goods  over  future  goods.2 

In  antiquity  and  the  Middle  Ages  the  discussion  with 
regard  to  interest  was  largely  ethical  or  religious,  and  the 
participants  in  the  controversy  had  in  mind  the  payment 

1  But  if  the  borrower  has  used  up  the  wealth  loaned  him,  —  and  he  may 
have  borrowed  it  only  to  consume  it,  —  will  it  then  be  renewed  ?     Certainly 
not.      Loans  for  consumption  lead  to  the  destruction  of  wealth   and   are 
liable  to  ruin  the  debtor,  —  a  fact  that  we  have  already  indicated  (page  358). 

2  This  argument,  presented  long  ago  by  Turgot,  constitutes  the  basis  of 
Boehm-Bawerk's  entire  theory  of  interest.     (Consult  this  author's  remark- 
able book  on  "  Capital  and  Interest,"  and  page  561.) 


558  PRINCIPLES   OF   POLITICAL  ECONOMY 

of  interest  for  borrowed  capital.  The  problem  they  sought 
to  solve,  as  we  shall  explain  in  the  next  section,  was  this: 
Ought  the  borrower  to  pay  interest  for  a  loan,  and  ought 
the  lender  to  exact  its  payment  ?  With  the  classical  econo- 
mists and  their  successors,  however,  the  problem  became 
primarily  economic,  not  ethical  or  religious,  and  is  better 
stated  in  these  terms:  How  can  we  account  for  the  gain 
which  a  capitalist  receives  for  employing  capital  in  a  business 
enterprise?  The  answers  to  this  question  are  by  no  means 
unanimous,  and  although  we  cannot  here  undertake  a  com- 
plete discussion  of  each  of  them,  we  shall  give  a  brief  state- 
ment of  the  several  groups  of  answers,1  following  the 
classification  made  by  Boehm-Bawerk  :  — 

1.  The  productivity  theories.     This  name  is  applied  to  the 
theories  based  on  the  familiar  fact  that  a  workman  provided 
with    capital    (tools,    machines,    etc.)    can    produce    more 
products   or  better   products   than   without   capital.     This 
additional   product   "  produced   by  capital "  constitutes   in- 
terest.    J.  B.  Say  seems  to  have  been  the  first  author  to 
speak  of  the  "  productive  power  "  and  the  "  productive  ser- 
vices "  of  capital.     The  earlier  advocates  of  the  productivity 
theory  do  not  inquire  whether  or  why  goods  produced  with 
the  aid  of  capital  are  worth  more  than  the  cost  of  their  pro- 
duction, including  the  cost  of  the  capital  itself  or  of  the  wear 
and  tear  of  capital  during  the  productive  process.     Subse- 
quent partisans  of  this  theory,  while  retaining  the  idea  of 
the  actual   physical   productivity  of  capital,  recognize  the 
necessity  for  some  explanation  of  the  gain  in  value,  i.e.  the 
economic  productivity  of  capital. 

2.  The  use  theory  asserts,  in   brief,  that  in  capitalistic 
production  there  is  a  sacrifice  not  only  of  the  material  sub- 

1  For  a  further  discussion  of  this  subject  we  refer  the  reader  to  the  books 
upon  which  our  own  resume'  is  based:  Boehm-Bawerk,  "  Capital  and  Inter- 
est," Vol.  I;  Macfarlane,  "Value  and  Distribution"  ;  the  article  on  "Zins" 
in  Conrad's  "  Handwoerterbuch  der  Staatswissenschaften  "  ;  Kleinwachter, 
"  Das  Einkommen  und  seine  Vertheilung. " 


THE  USE  THEORY   OF   INTEREST  559 

stance  of  capital,  but  also  a  sacrifice  of  the  use  of  the  capital 
during  the  period  of  production.  The  best  and  fullest  state- 
ment of  this  theory  is  found  in  the  work  of  the  brilliant 
Austrian  economist,  Carl  Menger,  from  which  we  quote  as 
follows  :  — 

"Production  always  demands  a  certain  period  of  time, 
sometimes  long,  sometimes  short.  For  the  purpose  of  pro- 
duction it  is  necessary  that  a  person  should  have  productive 
goods  at  his  disposal  not  only  at  any  single  stage  inside  that 
period,  but  that  he  should  retain  them  at  his  disposal  during 
the  whole  period,  and  unite  them  in  the  process  of  produc- 
tion. The  disposal  over  quantities  of  capital-goods  during 
certain  periods  of  time  therefore  constitutes  one  of  the  con- 
ditions of  production. 

"  This  use  of  capital,  or  power  to  dispose  of  it,  so  far  as  it 
is  in  demand  and  not  to  be  had  in  sufficient  quantity,  may 
thus  obtain  a  value  and  become  an  economic  commodity. 
When  this  happens,  as  is  usually  the  case,  then,  over  and 
above  the  other  means  of  production  employed  in  any  actual 
productive  process,  there  enters  into  the  sum  of  value  con- 
tained in  the  anticipated  product  the  disposal  (or  power  to 
dispose)  of  the  goods  requisite  for  production." 

This  theory  clearly  rests  on  the  contention  that  there  is 
a  use  of  capital  distinct  and  separate  from  that  involved  in 
the  using  of  the  capital  itself. 

3.  The  abstinence  theory,  first  clearly  stated  by  N.  W. 
Senior,  is  based  on  the  thought  that  if  men  postpone  the 
present  enjoyment  of  their  wealth,  and  devote  the  resources 
so  spared  to  the  purposes  of  production,  it  is  manifest  that 
the  resulting  increase  in  product  is  very  intimately  con- 
nected with  the  saving  which  made  possible  the  adoption  of 
the  more  productive  methods.  In  other  words,  the  cost  of 
production  must  include  not  only  the  labor  and  capital  that 
is  used  in  the  process  of  production,  but  also  the  disutility 
involved  in  the  postponement  of  present  enjoyment,  or,  in 
brief,  abstinence. 


560  PRINCIPLES   OF   POLITICAL   ECONOMY 

4.  The  labor  theories.     Under  this  name  Boehm-Bawerk 
includes  a  number  of  theories  which  agree  in  considering 
interest  as  the  remuneration  for  "  labor  "  performed  by  the 
capitalist.    Concerning  the  nature  of  this  "  labor  "  there  is  a 
divergence  of  views. 

(a)  The  English  group  of  authors,  especially  James  Mill, 
regards  interest  as  wages  for  the  labor  of  producing  capital. 

(5)  The  French  group,  chief  among  which  is  Courcelle- 
Seneuil,  defines  interest  as  the  "  wages  of  saving,"  and  em- 
phasizes the  will-power  and  firmness  of  purpose  required  to 
save  wealth. 

(c)  The  German  group,  to  which  many  so-called  "  social- 
ists of  the  chair  "  belong,  regards  the  ownership  of  land  and 
of  capital  as  a  social  office  or  "function,"  and  defines  the 
return  from  land  and  capital  as  a  kind  of  salary  due  to  the 
leaders  of  agricultural  or  industrial  enterprises.  This  con- 
ception manifestly  makes  little  or  no  distinction  between 
profits  and  interest. 

5.  The    exploitation    theory.      This    celebrated    theory, 
founded  by  Rodbertus  and  Karl  Marx,  regards  rent,  interest, 
and  profits  as  all  due  to  the  exploitation  of   workingmen. 
Accepting  the  defective  terminology  of  the  orthodox  econo- 
mists, these  authors  frequently  employ  profits  and  interest 
as  interchangeable  terms,  and  direct  their  attack  against  the 
whole  complex  return  secured  by  the  capitalist.     The  social- 
istic attack  is  much  more  effectual  with  regard  to  profit  than 
with  regard  to  interest ;  we  shall  therefore  discuss  the  ex- 
ploitation .theory  when  we  take  up  the  legitimacy  of  profits. 

As  applied  to  interest,  the  exploitation  theory  may  be 
fairly  stated  in  the  following  propositions  :  — 

The  value  of  any  commodity  is  measured  by  the  quantity 
of  labor  required  to  produce  it. 

Capital  is  not  an  original  and  independent  factor  of  pro- 
duction, but  may  be  resolved  into  the  labor  that  produced  it. 

The  whole  product  belongs  in  equity  to  the  laborer.  The 
capitalist,  however,  takes  advantage  of  the  laborer's  necessi- 


THE  TIME   THEORY   OF   INTEREST  561 

ties  and  compels  him  to  make  a  wage-contract  that  despoils 
the  wage-earner  of  a  large  part  of  the  product  of  his  labor; 
this  is  done,  of  course,  under  the  sanction  of  law  and  custom. 

6.  The  sixth  group  of  authors  treats  the  problem  of  interest 
as  primarily  a  problem  of  value  and  regards  the  influence  of 
time,  in  the  estimation  of  values,  as  the  fundamental  cause  of 
all  economic  phenomena  connected  with  interest.  "  Present 
goods,"  says  Boehm-Bawerk,  the  principal  advocate  of  this 
theory,  "are  as  a  rule  worth  more  than. future  goods  of  like 
kind  and  number."  The  productivity  of  capital  is  not  the 
only  cause  of  this  higher  valuation  of  present  goods ;  there 
are  two  other  causes.  One  is  the  fact  that  many  men  are 
less  efficiently  provided  for  in  the  present  than  they  hope  to 
be  in  the  future.  There  is,  moreover,  a  tendency  of  mankind 
to  underrate  or  discount  anything  in  the  future. 

Roundabout  methods  of  production  are  generally  more 
profitable  than  direct  methods.  But  long,  circuitous  pro- 
cesses of  production  require  the  necessary  money  or  present 
goods  to  meet  the  demands  that  arise  during  production. 
Hence  present  goods,  which  enable  us  to  obtain  the  advan- 
tage of  roundabout  methods,  are  worth  more  than  future 
goods,  which  are  not  yet  applicable  productively.  In  other 
words,  the  capitalist  may  obtain,  with  a  proportionately 
smaller  quantity  of  present  (and  therefore  more  valuable) 
goods,  a  proportionately  larger  quantity  of  future  (and  there- 
fore less  valuable)  goods,  which,  as  time  goes  on,  gradually 
grow  in  value  until  they  reach,  so  to  speak,  the  status  and 
value  of  present  goods.  Whoever  exchanges  present  for 
future  goods  demands  some  premium,  some  surplus  in  value ; 
this  premium  or  surplus  is  interest. 

Some  of  these  theories  are  endeavors  to  explain  interest  as 
an  economic  category.  Others  are  attempts  to  justify  the 
capitalist's  income.  We  may  safely  accept  the  principle  that 
so  long  as  there  is  capital  there  will  be  interest,  and  as  the 
socialists  by  no  means  contemplate  the  destruction  of  capital, 
interest  will  exist  in  a  socialistic  community.  But  who  shall 


562  PRINCIPLES   OF  "POLITICAL   ECONOMY 

collect  this  interest?  That  is  an  entirely  different  question. 
Does  not  the  owner  of  capital  in  modern  society  possess  a 
despotic  power,  and  does  not  interest  therefore  partake  of 
the  nature  of  an  unfair  income  ? 

Nowadays,  the  discussion  regarding  the  legitimacy  of  in- 
terest has  been  shifted  to  another  domain ;  and  the  present 
form  of  the  question  is  :  Shall  we  admit  the  legitimacy  of 
private  property  in  capital  ?  If  we  do,  the  legitimacy  of 
interest  follows  as  a  logical  consequence.  Likewise,  once  we 
have  admitted  that  houses  may  become  objects  of  private 
property,  the  legitimacy  of  rent  requires  no  proof.  What 
is  the  need  of  inquiring  whether  the  house  can  be  employed 
productively,  or  whether  the  owner,  by  not  occupying  it, 
undergoes  privation  ? 

Even  in  case  borrowed  wealth  has  not  been  employed  pro- 
ductively, and  could  not,  by  reason  of  circumstances,  have 
been  so  employed  ;  or,  in  other  words,  in  case  it  is  not  capital, 
but  simply  objects  of  consumption,  why  should  the  owner  of 
wealth  be  obliged  to  lend  it  without  compensation?  The 
admonition  mutuum  date  nil  inde  sperantes  is  evidently  not 
economic,  but  evangelical,  like  the  teaching  that  he  who  has 
two  garments  should  give  away  one  of  them.  From  the 
economic  and  legal  point  of  view,  a  sufficient  justification 
of  interest  consists  in  the  simple  principle  that  no  man  shall 
be  deprived  of  his  belongings,  and  that  whoever  consents  to 
relinquish  possession  of  them  to  the  advantage  of  others  has 
a  right  to  do  this  on  whatsoever  conditions  it  may  please  him 
to  prescribe. 

What  matters  it  whether  or  not  the  lender  thus  experi- 
ences privation  and  makes  a  sacrifice  ?  Since  when  is  a  per- 
son's remuneration,  be  it  profit  or  wages,  proportionate  to  the 
sacrifice  he  has  made  or  the  privation  he  has  experienced  ? 
By  virtue  of  what  principle  shall  I  be  obliged  to  put  gratui- 
tously at  the  disposal  of  my  fellow-men  all  the  property  that 
I  cannot  or  do  not  wish  to  make  use  of  for  myself  ?  Must  I 
allow  other  people  to  occupy  my  apartments  because  I  am 


THE   HISTORY  OF   INTEREST  563 

compelled  to  be  away,  or  let  them  eat  my  dinner  because  I 
am  not  hungry  ?  Such  a  doctrine  would  need  to  be  based  on 
the  principle  that  in  this  world  a  man  has  a  right  only  to  the 
amount  of  wealth  strictly  necessary  for  his  own  consumption, 
and  that  the  surplus  belongs  by  right  to  all  mankind.  To 
accept  this  principle  is  to  adopt  communism  pure  and  simple. 

For  these  reasons,  the  question  is  to-day  scarcely  a  matter 
for  discussion.  Catholic  social  reformers,  while  retaining  the 
old  dislike  for  interest,  —  usura  vorax,  —  confine  themselves 
to  seeking  a  means  for  diminishing  the  power  of  money ;  and 
this  is  a  perfectly  legitimate  endeavor.  Socialists  themselves, 
at  least  those  belonging  to  the  collectivist  school,  frankly 
admit  that  interest  is  an  inevitable  consequence  of  the  right 
of  private  property.  They  simply  shift  the  controversy  to 
another  quarter,  and,  instead  of  attacking  the  legitimacy  of 
interest,  they  attack  the  legitimacy  of  private  property  in 
capital,  as  we 'have  pointed  out  in  the  preceding  section.  It 
is  plain  that  whenever  the  individual  ownership  of  capital  is 
abolished,  the  payment  of  interest  will  also  cease. 

As  the  legitimacy  of  interest  seems  so  evident  to-day,  why 
has  it  so  long  been  denied  ?  Because  of  historical  circum- 
stances which  we  shall  now  consider. 

III.  History  of  Loans  at  Interest 

Throughout  antiquity,  loans  were  made  at  interest,  and 
often  on  hard  conditions.  But  such  great  men  as  Moses, 
Aristotle,  and  the  severe  Cato  himself,  have  roundly  stigma- 
tized it.  After  the  advent  of  the  Christian  religion,  even 
more  vigorous  attacks  were  made  upon  it  by  the  Church 
Fathers ;  and  when  the  power  of  the  Church  had  been  firmly 
established,  loans  at  interest  were  expressly  forbidden  by 
civil  as  well  as  by  canon  law.1 

1  The  formal  prohibition  of  loans  at  interest  between  Christians  dates  from 
the  Council  of  Vienna,  held  in  1311.  It  was  still  permittee!  on  the  part  of  Jews, 
because  it  was  felt  that  money-lenders  could  not  be  dispensed  with,  and  that 
the  Jews  rendered  Christians  a  great  service  by  bearing  the  burden  of  this  sin. 


564  PRINCIPLES    OF    POLITICAL   ECONOMY 

Although  this  attitude  subsequently  came  to  be  regarded 
with  profound  contempt  and  considered  as  betraying  total 
ignorance  of  economic  laws,  it  can  very  easily  be  explained 
by  the  conditions  which  prevailed  at  that  time. 

We  have  already  called  attention  (page  359)  to  the  fact 
that  until  a  comparatively  recent  period,  credit  —  the  loan  of 
money  —  could  not  possess  a  productive  character  ;  it  could 
serve,  and  as  a  matter  of  fact  did  serve,  only  for  consump- 
tion. When,  therefore,  the  ancients  and  the  canonists 
condemned  interest  as  usurious,  they  were  not  so  greatly 
mistaken  as  is  sometimes  supposed.  They  showed  that  they 
possessed  an  accurate  knowledge  of  the  economic  state  of 
their  own  times. 

The  borrowers  in  those  days  were  poor  plebeians  who 
asked  the  Roman  patricians  for  means  to  buy  bread,  or  im- 
pecunious knights  who  obtained  their  equipment  for  the 
crusades  from  the  Jews  or  the  Lombards  of  the  Middle  Ages. 
In  both  cases  we  have  examples  of  personal,  and  therefore 
unproductive,  consumption.  When  the  time  for  settlement 
came,  the  debtors  could  pay  neither  interest  nor  capital; 
they  were  therefore  forced  to  surrender  themselves  and  their 
labor,  and  become  the  slaves  of  their  creditors.1  Under  these 
circumstances,  loans  at  interest  led,  on  the  part  of  the  lender, 
to  an  abuse  of  the  right  of  property,  and  from  the  bor- 
rower's point  of  view  became  an  instrument  of  spoliation 
and  destruction.  This  is  sufficient  to  explain  the  old  and 
stubborn  prejudice  against  interest. 

In  those  days  capital  was  scarcely  known,  even  by  name. 
(See  page  118.)  Land  was  almost  the  only  kind  of  produc- 
tive wealth.  Hence  no  one  thought  of  denying  the  justice 
of  rent  for  land ;  for  when  a  farm  is  leased,  one  can  see  the 

1  The  houses  of  Roman  patricians  contained  cellars  that  served  as  prisons 
(ergastula)  for  insolvent  debtors.  In  the  Middle  Ages,  Shakespeare's  example 
of  Shy  lock  notwithstanding,  customs  became  less  severe  ;  a  powerful  but 
insolvent  debtor  was  only  required  to  send  hostages  to  his  creditor  and  to  pay 
for  their  food,  —  which  was  still  a  very  burdensome  obligation.  Does  not  this 
condition  of  things  justify  the  canonists'  saying,  jus  belli,  jus  usurae  ? 


MEDIEVAL   VIEWS   CONCERNING   INTEREST  565 

income  proceed,  so  to  speak,  from  the  soil  itself  in  the  shape 
of  crops,  and  it  was  clearly  felt  that  the  rent  paid  to  the 
landlord  was  not  paid  out  of  the  tenant's  pocket.  But  the 
same  was  not  true  of  money,  and  it  seemed  perfectly  correct 
to  declare  with  Aristotle  that  money  cannot  produce  more 
money.  This  was  why  St.  John  Chrysostom,  contrasting 
the  landlord  with  the  capitalist,  became  indignant  because 
the  lender  "  practised  a  damnable  kind  of  agriculture,  reap- 
ing where  he  had  not  sown." 

Moreover,  a  proof  that  the  arguments  of  the  canonists 
were  not  pure  casuistry  consists  in  the  fact  that  in  all  cases 
where  it  was  plain  that  the  borrower  would  obtain  a  profit 
from  the  use  of  the  loan  (by  carrying  on  trade,  for  example), 
and  where  the  lender  incurred  some  risk,  interest  was  con- 
sidered legitimate.1 

Yet  it  might  be  objected  that,  since  the  canonists  frankly 
admitted  private  property  in  capital,  or  at  least  in  money, 
they  ought  also  to  have  seen  the  force  of  such  arguments  as 
those  contained  in  the  preceding  section,  and  admitted  the 
legitimacy  of  interest.  But  this  objection  would  not  be  valid. 
The  loan  of  money  necessarily  implies  the  use  of  the  money 
lent,  i.e.  its  exchange  for  something  else;  and  it  seemed 
absurd  to  the  canonists  that  the  lender,  after  having  given 
up  the  money  lent,  should  exact  a  money-payment  for  its  use.2 

But  if  the  lender  transferred  the  full  ownership  of  the 
amount  to  the  borrower,  and  thus  gave  up  all  claim  to  his 
capital,  they  readily  admitted  the  legitimacy  of  the  resultant 

1  The  Lateran  Council  of  1515  stated  the  matter  with  perfect  clearness: 
' '  There  is  usury  wherever  there  is  profit  which  does  not  arise  from  something 
productive  and  which  implies  neither  labor,  nor  expense,  nor  risk  on  the  part 
of  the  lender." 

2  Albertus  Magnus  and  Thomas  Aquinas  insisted  that  money  cannot  be 
used  by  one  person  and  owned  by  another.     A  lender,   they  argued,  is 
*'  therefore  not  entitled  to  compensation  for  the  use  of  money  loaned,  but 
only  to  its  restitution,  since  the  fact  of  borrowing  vested  ownership  in  the 
borrower  ;  nor  can  he  claim  compensation  for  the  time  that  elapsed  between 
the  act  of  lending  and  the  restitution,  for  time  belongs  to  God,  and  cannot 
be  bought  and  sold.     Therefore  a  loan  must  be  either  made  outright,  or  else 


566  PRINCIPLES    OF   POLITICAL    ECONOMY 

income  of  the  creditor,  for  then  the  loan  became  an  income- 
yielding  investment. 

The  Reformation  naturally  brought  about  a  reaction  against 
the  canonical  doctrine.  Calvin  showed  a  disposition  to  tol- 
erate loans  at  interest  under  certain  conditions ;  and  in  the 
eighteenth  century  two  great  French  Huguenot  jurists, 
Dumoulin  and  Saumaise,  refuted  the  scholastic  arguments 
against  usury.1  Yet  not  until  we  reach  the  scientific  econo- 
mists, Turgot  ("  Memoire  sur  les  prets  d'argent,"  1769)  and 
Bentham  ("Defence  of  Usury,"  1787),  is  the  economic  doc- 
trine in  favor  of  loans  at  interest  firmly  established.  Econo- 
mists are  now  unanimous  in  its  acceptance,  and  their  opinion 
is  well  founded.  Why  ?  Because  the  economic  conditions 
of  life  are  not  what  they  were  at  the  time  of  the  Church 
Fathers  and  the  scholastics. 

On  the  one  hand,  the  parts  have  been  inverted.  To-day 
the  impecunious  do  not  usually  borrow  from  the  wealthy, 
nor  the  common  people  from  the  patricians;  but  the  rich 
and  powerful  —  speculators,  gigantic  corporations,  banks,  the 
owners  of  gold  mines,  and,  above  all,  the  governments  of  great 

in  the  form  of  a  mortgage  or  bill  of  sale,  and  cannot  involve  a  thing  like 
money,  the  very  nature  of  which  is  repugnant  to  the  rules  providing  for  com- 
pensation in  cases  of  borrowing  and  lending." — COSSA,  "Introduction  to 
the  Study  of  Political  Economy." 

The  student  must  bear  in  mind  that  the  term  usury  originally  meant  use- 
money  and  was  synonymous  with  our  term  interest,  although  to-day  it  is  used 
to  mean  exorbitant  or  extortionate  interest. 

1  It  is  interesting  to  note  that  the  Jesuits  contributed  quite  as  effectively  as 
the  Protestants  to  the  recognition  of  loans  at  interest  as  permissible.  They 
invented  subtle  devices  for  avoiding  the  prohibitory  law,  such  as  the  con- 
tractus  trinuSj  a  more  or  less  fictitious  contract  by  which  the  lender  was 
regarded  as  a  partner  in  the  risks  and  profits  of  an  enterprise,  who  insured 
himself  against  losses  and  gave  up  his  claim  to  profits,  in  consideration  of  a 
fixed  sum  paya^e  annually. 

Interest  was  also  allowed  in  the  form  of  a  penalty  for  the  failure  to  repay 
the  loan  at  the  specified  time  ;  and  as  nothing  prevented  specifying  the  time 
for  repayment  as  the  day  after  making  the  loan,  it  was  a  very  simple  matter 
thus  to  elude  the  law. 

(For  further  details,  consult  Ashley,  "Economic  History,"  Chapter  7, 
and  Boehm-Bawerk,  "  Capital  and  Interest,"  Vol.  I.) 


THE  CHANGED  NATURE  OF  LOANS         567 

nations  —  most  frequently  borrow  from  the  public,  from  the 
common  people,  and  make  up  their  funds  out  of  the  savings 
of  the  masses.  The  result  is  that  oftentimes  the  lender  is  a 
worthier  object  of  compassion  than  the  borrower.  Public 
opinion  and  the  law  are  not  needed  to  protect  the  weak  and 
defenceless  borrower  against  the  rapacity  of  the  lender,  but 
rather  to  prevent  the  ignorant  lender  from  being  exploited 
by  individuals  and  corporations  that  make  a  practice  of 
borrowing  enormous  amounts  from  the  general  public, — 
of  which  modern  financial  history  furnishes  so  many  scan- 
dalous examples.1 

On  the  other  hand,  —  the  two  changes  were  concomitant,  — 
the  very  nature  of  the  loan  contract  became  different  from 
what  it  was.  Men,  as  a  rule,  do  not  now  borrow  in  order 
to  obtain  food,  but  in  order  to  increase  their  wealth. 
To  borrow  for  purposes  of  personal  consumption  is  the  ex- 
ception, and  credit  has  assumed  the  true  economic  character 
of  a  method  of  production.2  The  entrepreneur,  that  is  to 

1  "  Everybody  knows  what  brigandage  is  carried  on  to-day  under  the  guise 
of  founding  stock  companies.    Nothing  is  more  shameful  or  more  criminal. 
It  is  one  of  the  saddest  symptoms  of  public  demoralization.  .  .  .     The  place 
of  the  great  bands  of  adventurers  and  robbers  who  held  merchants  for  ran- 
som, and  pillaged  the  country  in  the  Middle  Ages,  is  now  taken  by  stock 
companies,  many  of  which  carry  on  their  operations  with  more  security,  more 
impunity,  and  more  leisure  and  profit  for  their  founders  and  directors  than 
their  mediaeval  compeers." — LEROY-BEAULIEU  in  the  Economiste  franqais 
for  July  21,  1881. 

2  This  is  not  yet  universally  true.     In  the  country  districts,  and  especially 
in  the  farming  regions  of  Russia,  along  the  Danube,  in  Italy,  in  Algeria,  etc., 
credit  still  possesses  its  former  nature,  peasant  borrowers  being  exploited  and 
ultimately  expropriated  by  money-lenders.    This  state  of  affairs  has  given  rise 
to  the  anti-semitic  movement,  and  shows  that  in  some  countries,  and  under 
certain  conditions,  the  old  laws  against  usury  may  be  perfectly  defensible. 

But  even  in  these  places  agricultural  credit  associations,  to  which  we  have 
already  referred  (page  395),  have  begun  to  change  the  respective  situations  of 
debtors  and  creditors. 

In  advanced  countries,  credit  for  purposes  of  consumption,  i.e.  borrowing 
money  in  order  to  spend  it  unproductively,  is  practised  only  by  wealthy 
prodigals  and  a  few  of  those  who  patronize  the  pawnshops.  We  must,  how- 
ever, place  in  the  same  category  the  governments  of  great  nations,  which, 


568  PRINCIPLES    OF   POLITICAL   ECONOMY 

say,  the  real  agent  and  director  of  production  (see  page  484); 
hires  the  capital  and  pays  the  interest ;  and  this  interest  is 
part  of  the  cost  of  production  just  as  much  as  the  wages 
of  labor  or  the  rent  of  the  factory.  It  would,  therefore, 
be  absurd  to  dispense,  for  humanitarian  reasons,  with  the 
payment  of  interest ;  for  this  would  simply  increase  the 
entrepreneur's  profits. 

Even  to-day,  however,  laws  concerning  the  loan  of  capital 
bear  traces  of  the  old  condemnation  of  interest.  Many  of 
the  states  of  the  Union  have  so-called  usury  laws,  which  fix 
the  maximum  rate  of  interest,  and  declare  that  any  excess 
above  this  rate  shall  not  be  recoverable.  In  only  a  few  of 
them  is  a  higher  rate  than  twelve  per  cent  allowed  by  law, 
despite  the  constant  protests  of  economists,  who  would  have 
the  rate  of  interest  determined  by  the  forces  of  demand  and 
supply,  like  wages  and  rent. 

IV.   The  Laws  of  Interest 

Early  modern  political  economists  took  no  particular  pains 
to  define  the  term  interest.  Indeed,  many  of  the  classical 
economists  were  unable  to  get  a  very  accurate  notion  of 
the  term,  because  of  their  failure  to  separate  the  earnings  of 
capital  per  se  from  the  remuneration  due  to  the  work  of  suc- 
cessful superintendence ;  because,  in  other  words,  interest 
and  profits  were  treated  together  under  the  general  name  of 
profits.  In  popular  speech  to-day,  profits  are  sometimes 
made  to  include  the  interest  of  capital,  as  when  a  man  not 
only  directs  an  enterprise,  but  also  supplies  the  capital  re- 
quired to  found  it  and  carry  it  on.  The  two  incomes  here 
united,  are,  nevertheless,  distinct ;  if  the  director  of  the 
enterprise,  i.e.  the  entrepreneur,  were  obliged  to  borrow  his 

during  the  past  century,  have  consumed,  for  the  most  part  unproductively, 
and  even  in  works  of  destruction,  $30,000,000,000  of  capital,  for  which 
the  unfortunate  taxpayers  will  pay  interest  forever,  or  at  least  until  these 
governments  are  declared  bankrupt.  This  class  of  borrowers  is,  to  be  sure, 
too  powerful  to  need  compassion  ;  it  is  the  taxpayers  that  have  a  right  to  be 
pitied. 


PURE    INTEREST  569 

capital,  it  would  immediately  become  apparent  that  profits 
and  interest  are  separate  and  different  incomes. 

The  distinction  between  profits  and  interest,  however,  is 
not  the  only  one  that  economists  have  deemed  it  advisable  to 
draw,  in  this  connection,  for  the  sake  of  clear  thinking.  They 
have  found  that  the  term  interest  is  itself  often  applied  to  a 
composite  of  various  elements ;  they  have  therefore  endeav- 
ored to  remove  from  the  concept  of  interest  several  elements 
which,  in  popular  parlance,  are  included  in  that  term.  It 
follows,  therefore,  that  the  term  interest  means,  in  the 
vocabulary  of  economic  science,  something  different  from  its 
customary  acceptation.  Pure  interest,  i.e.  interest  in  the 
strictest  economic  sense  of  the  term,  which  may  be  defined 
as  the  price  paid  for  the  use  of  capital,  or,  from  the  distribu- 
tive point  of  view,  as  the  share  of  the  capitalist  in  the  product 
of  industry,  springs  from  the  circumstance  that  the  value  of 
goods  produced  with  the  help  of  capital  is  greater  than  the 
value  of  the  goods  consumed  in  their  production  plus  the 
cost  of  the  labor  employed. 

In  the  real  world  of  business  we  rarely  encounter  interest 
pure  and  simple,  but  nearly  always  find  it  combined  with 
other  kinds  of  compensation,  of  which  the  following  two  are 
most  frequently  present:  — 

(#)  The  cost  of  renewing  fixed  capital  —  for  example,  a 
house  or  a  piano  —  the  constant  use  of  which  involves  wear 
and  tear  amounting  to  gradual  destruction.  The  owner  of 
borrowed  capital  must  therefore  receive,  besides  a  payment 
for  the  use  of  the  house  or  the  piano,  a  sum  sufficient  to  keep 
it  in  constant  repair. 

(5)  The  payment  for  the  risk  attending  the  investment  of 
capital.1 

1  This  element  of  risk,  to  which  we  refer  again  later,  may  depend,  as 
Roscher  points  out,  "on  the  doubtful  reliability  of  the  person  to  whom  the 
capital  is  confided  ;  on  the  uncertainty  of  the  branch  of  business  in  which  it 
is  intended  to  employ  it ;  or  on  the  uncertainty  of  the  commercial  situation  in 
general;  but  especially  may  it  depend  on  the  uncertainty  of  the  laws."  — 
"Principles  of  Political  Economy,"  translated  by  Lalor,  Vol.  II,  page  100. 


570  '  PRINCIPLES    OF   POLITICAL   ECONOMY 

Whenever  the  transaction  of  loans  involves  exceptionally 
high  expenses  of  management,  as  in  the  case  of  loans  made 
by  pawnshops,  the  term  interest  usually  involves  a  third 
element,  consisting  of  the  charge  due  to  these  exceptional 
expenses  involved  in  placing  the  loan. 

Whatever  remains  when  these  foreign  elements  have  been 
removed  constitutes  pure  interest.  Pure  interest,  therefore, 
so  nearly  as  we  can  approach  it  in  reality,  is  that  which 
would  be  paid  for  the  loan  of  money,  in  large  sums  and  for 
long  periods,  under  conditions  of  absolute  security. 

If  capital  were  loaned  in  the  shape  of  commodities,  —  such 
as  factories,  machinery,  and  other  instruments  of  production, 
—  and  not  in  the  shape  of  money,  a  different  price  would 
have  to  be  paid  for  the  loan  or  hire  of  each  commodity, 
according  to  its  quality,  durability,  and  productivity,  just  as 
the  rent  of  farms  differs  according  to  their  fertility  and  acces- 
sibility. But  capital  is  usually  lent  by  means  of  money  or 
of  credit-instruments  representing  money,  because  the  bor- 
rower prefers  to  receive  money  instead  of  goods,  which  may 
be  ill  suited  for  the  purposes  that  he  has  in  view;  and, 
furthermore,  because  capital  is  necessarily  offered  in  this  form 
by  those  who  have  saved  wealth  and  want  to  invest  it.  Men 
do  not  usually  save  capital  in  the  shape  of  commodities,  but 
in  the  shape  of  money. 

This  fact  accounts  for  the  frequency  of  the  statement  that 
interest  is  paid  for  the  use  of  money.  What  the  borrower 
really  wants,  however,  is  not  money,  but  the  goods  that 
money  will  buy,  —  the  goods  needed  to  carry  on  a  produc- 
tive enterprise.  As  Walker  puts  it :  "  One  borrows  $5000 
and  gives  a  note  for  that  sum,  with  interest.  With 
this  money,  he  purchases  live  stock,  machinery  for  his  fac- 
tory, or  goods  for  his  trade  :  these  were  what  he  wanted ; 
these  were  what  he  really  borrowed  ;  these  are  what  he 
really  pays  interest  upon.  The  money  was  solely  a  means 
to  that  end." 

An  important  consequence  of  this  fact,  clearly  perceived 


MONEY   AND   INTEREST  571 

by  Hume  long  before  Adam  Smith  published  his  "  Wealth  of 
Nations,"  is  that  the  rate  of  interest  does  not  depend  on  the 
amount  of  gold  and  silver  that  the  country  possesses,  "but 
on  the  amount  of  its  riches  or  stock."  Yet  it  is  still  a  popu- 
lar idea  that  the  rate  of  interest,  i.e.  the  price  paid  for  the 
use  of  capital,  depends  solely  or  largely  on  the  amount  of 
money  in  the  country.  When  interest  is  high,  people  say  that 
money  is  scarce.  When  it  is  low,  they  declare  that  money 
is  abundant.  This  idea  is  correct  in  the  case  of  short-time 
loans,  usually  made  by  bankers  to  business  men  who  have 
contracted  debts  in  buying  goods,  and  who  must  make  pay- 
ment for  them  before  they  can  be  sold.  These  loans  are 
usually  made  in  the  form  of  bank  discounts.  When  money 
becomes  "tight,"  banks  find  that  their  reserves  diminish, 
and  are  obliged  to  curtail  their  loan  and  discount  business 
by  raising  the  interest  on  loans  and  increasing  the  rate  of 
discount.1 

But  this  idea  is  false  in  the  case  of  long-time  loans,  the 
only  kind  which  concerns  us  here  in  connection  with  the 
study  of  the  capitalist's  income.  In  refutation  of  the  idea 
that  an  increase  in  the  supply  of  money  lowers  the  interest 
on  permanent  investments,  while  a  decreased  supply  raises 
it,  let  it  suffice  to  say  that  the  income  from  loaned  capital, 
as  well  as  the  capital  itself,  exists  in  the  form  of  money,  and 
that  therefore  the  rate  of  interest,  i.e.  the  ratio  between 
income  and  capital,  cannot  be  affected  by  a  factor  which, 
as  a  fluctuation  in  the  value  of  money,  operates  equally  and 
simultaneously  upon  both  terms  of  the  ratio. 

The  substitution  of  money  for  commodities  in  loan-trans- 
actions, by  which  what  would  otherwise  have  been  simply 
a  case  of  hire  becomes  money-lending,  or  investment  prop- 
erly speaking,  involves  two  further  consequences  of  great 
importance. 

In  the  first  place,  it  introduces  in  the  determination  of 

1  We  have  already  seen  that  there  is  a  close  connection  between  the  supply 
of  money  and  the  rate  of  discount  (page  388,  etc.). 


572  PRINCIPLES    OF   POLITICAL    ECONOMY 

interest  (in  the  wide  sense  of  the  term)  a  new  and  im- 
portant element  already  referred  to,  viz.  the  solvency  of  -the 
debtor.  If  the  debtor's  solvency,  that  is,  his  ability  to  meet 
his  obligations,  is  doubtful,  this  involves  additional  risk  for 
the  lender,  and  will  lead  him  to  demand  higher  interest  to 
counterbalance  the  possibility  of  losing  his  capital.  This 
premium  for  insurance  against  the  risk  of  loss1  —  the  lender 
furnishing  his  own  insurance  —  accounts  almost  entirely  for 
variations  in  the  rate  of  interest  on  different  investments. 

In  the  second  place,  it  tends,  when  there  is  equal  security 
and  perfect  mobility  of  capital,2  to  eliminate  all  other  causes 
of  variation  in  the  rate  of  interest  and  to  equalize  the  cost  of 
borrowing  any  or  all  kinds  of  capital.  The  different  em- 
ployments of  capital  tend  uniformly  to  pay  the  same  rate  of 
interest,  for  if  one  branch  of  business  is  much  more  profit- 
able than  another,  capital  is  allowed  to  flow  into  the  former 
and  out  of  the  latter  until  a  level  is  reached.  Money-capital, 
we  have  already  learned,  can  be  sent  almost  without  cost 
from  any  part  of  the  world  to  any  other  part.  All  kinds  of 
capital,  therefore,  being  lent  and  borrowed  in  the  form  of 
money,  are  on  the  same  footing ;  qualitative  differences  dis- 
appear, and  only  quantitative  differences  remain.3 

1  This  is  what  the  Germans  aptly  call  Eisikopramie. 

2  We  have  already  said,  elsewhere,  that  the  assumption  of  perfect  mobility 
and  perfectly  free  competition  is  more  likely  to  be  realized  in  regard  to  money- 
capital  than  in  regard  to  most  other  commodities.     Yet  the  fact  that  there 
are  differing  rates  of  interest  in  different  markets,  even  for  investments  offer- 
ing precisely  the  same  degree  of  risk,  shows  that  competition  is  not  perfect. 
The  causes  for  this  must  be  found  in  the  disinclination  of  capital  to  emi- 
grate, the  inertia  of  capitalists  or  borrowers,  the  lender's  or  borrower's 
ignorance  of  the  money-market,  or  the  pressing  nature  of  the  borrower's 
need  for  capital. 

3  There  would  seem  to  be  no  differences  of  durability  so  long  as  capital  is 
in  the  form  of  money.     When  capital  is  concrete,  i.e.  when  it  exists  in  the 
shape  of  productive  goods,  the  cost  of  its  maintenance  is  an  important  matter, 
and  something  must  be  paid  —  in  addition  to  the  cost  of  its  use  —  for  the 
"  wear  and  tear"  to  which  such  capital  is  subjected.     Money-capital  being 
by  nature  indestructible,  and  undergoing  no  wear  and  tear,  all  differences  in 


SUPPLY   AND   DEMAND   IN   CAPITAL  573 

It  follows  from  what  has  been  said  regarding  the  excep- 
tional mobility  of  money-capital,  that  there  is  at  a  given 
time  but  one  and  the  same  rate  of  interest  in  the  money- 
market  of  a  whole  nation,  or  even  of  the  whole  world. 

The  question  now  arises  :  What  are  the  natural  economic 
laws  which  determine  this  general  rate  of  interest,  i.e.  the 
price  paid  for  the  use  of  money-capital  ?  Unlike  the  question 
concerning  the  fundamental  reasons  for  the  existence  of  in- 
terest as  a  category  of  income,  —  a  question  with  regard  to 
which  Boehm-Bawerk  divides  political  economists  into  six 
separate  and  distinct  groups  or  tendencies,1  —  there  is  con- 
siderable agreement  among  economists  with  regard  to  this 
subject.  We  have  a  pretty  fair  idea  of  the  causes  affecting 
the  general  rate  of  interest.  We  cannot,  to  be  sure,  attribute 
its  determination  to  any  single  cause,  any  more  than  we 
succeeded  in  discovering  a  single  determinant  of  the  value 
of  goods  (page  64)  or  of  the  price  of  labor  (page  521); 
there  are  really  many  factors,  which  may  be  summed  up  in 
the  old  formula  of  supply  and  demand  or  in  the  newer  doc- 
trine of  final  utility. 

In  this  connection,  as,  indeed,  in  every  attempt  to  inter- 
pret it  scientifically,  the  formula  of  supply  and  demand  re- 
quires some  explanation. 

The  supply  of  capital,  seeking  investment  in  the  form  of 
money  and  credit  instruments,  depends  on  the  following 
factors :  (a)  On  the  nation's  capacity  for  saving,  promoted 
by  good  institutions  to  facilitate  the  storing  of  wealth  and 
good  credit  institutions  to  provide  investment  for  the  capital 
thus  created.  (5)  On  the  security  afforded  to  investors ;  if 

the  cost  of  capital  that  are  due  to  this  necessity  for  maintaining  the  value  of 
concrete  capital  should  disappear. 

For  the  borrower  of  capital,  the  matter  is  different.  He  must  return  the 
capital  at  the  end  of  a  certain  period,  say  ten  years  ;  for  him,  this  is  equiva- 
lent to  its  destruction  in  that  space  of  time.  If  he  is  a  careful  business  man, 
he  will  provide  for  the  renewal  of  the  capital  just  as  though  it  existed  in  the 
shape  of  concrete  goods.  All  industrial  firms  act  on  this  principle. 

1  See  page  558. 


574  PRINCIPLES   OF   POLITICAL   ECONOMY 

this  is  lacking,  the  economized  wealth  will  not  be  put  on  the 
loan-market,  but  hoarded  unproductively.  (c)  On  the  ex- 
istence of  a  large  class  of  persons  unable  or  unwilling  to 
utilize  their  own  capital  in  active  business ;  for  it  is  evident 
that  when  every  member  of  society  employs  his  own  capital, 
capital  will  not  be  offered  on  the  market,  no  matter  how 
abundant  it  may  be. 

The  demand  for  capital,  on  the  other  hand,  is  determined 
by  its  productivity.1  Unlike  the  cost  of  hiring  land,  which 
depends  so  largely  on  the  fertility  of  each  particular  farm, 
we  are,  in  the  case  of  loans  in  capital,  not  concerned  with 
the  productivity  of  this  or  that  particular  kind  of  capital  ; 
we  ai*e  not  considering  capital  in  the  form  of  goods,  but  capi- 
tal in  genere,  capable  of  being  transformed  into  any  kind  of 
commodity;  we  are,  in  other  words,  concerned  with  capital 
as  a  mobile,  homogeneous  fund.  Professor  J.  B.  Clark,2  who 
has  probably  done  more  than  any  other  economist  to  distin- 
guish this  concept  of  capital  from  the  idea  of  capital  as  a 
sum  of  concrete  commodities,  contends  that  it  is  not  money, 
nor  even  materials,  machines,  or  buildings  that  the  capitalist 
lends,  but  a  sort  of  general  draft  upon  society,  —  value  in 
a  readily  convertible  form  ;  a  sort  of  abstract  fund  which  the 
entrepreneur  converts  into  concrete  capital. 

In  a  new  country  possessing  an  abundance  of  natural 
resources,  virgin  lands  to  be  brought  under  cultivation, 
mines  to  be  worked,  and  roads  to  be  built ;  or  even  in  an  old 
country  in  times  of  great  industrial  progress,  such  as  the 
middle  of  the  nineteenth  century,  —  this  general  state  of 
productiveness  will,  as  experience  has  shown,  cause  a  great 
increase  in  the  rate  of  interest. 

But  whether  a  country  be  new  or  old,  as  long  as  there  is 
any  advantage  in  the  employment  of  capital,  or  of  increased 

1  When  loans  are  made  for  purposes  of  consumption,  the  productivity  of 
the  capital  is  of  course  out  of  the  question,  and  the  rate  of  interest  is  limited 
only  by  the  need  of  the  borrower  ;  hence  it  may  become  exorbitant. 

2  Annals  of  the  American  Academy,  July,  1890. 


THE   PRODUCTIVITY   OF   CAPITAL  575 

quantities  of  capital,  in  any  branch  whatever,  the  demand 
for  capital  will  continue  to  increase.  The  point  beyond 
which  the  use  of  additional  capital  would  not  be  advan- 
tageous has  never  been  reached  in  the  industrial  life  of  any 
nation ;  nor  is  it  likely  ever  to  be  reached.  In  economic  life, 
therefore,  we  find,  on  the  one  hand,  a  practically  unlimited 
demand  for  capital  for  productive  purposes,  and,  on  the  other 
hand,  a  supply  of  capital  insufficient  to  satisfy  the  demand. 
This  circumstance  is  of  the  utmost  importance  in  determining 
the  rate  of  interest.  Wherever  the  supply  of  any  commod- 
ity is  not  fully  equal  to  the  demand  (in  the  widest  sense  of 
that  term),  part  of  the  demand  must  forego  satisfaction  ;  it 
remains,  so  to  speak,  "  potential."  Capital  will,  of  course, 
first  seek  those  investments  in  which  the  returns  are  greatest 
and  surest ;  and  whatever  capital  is  not  thus  employed  must 
turn  to  less  and  less  productive  uses. 

Let  us  suppose  that  the  earliest  and  most  productive  uses 
yield  an  interest  of  ten  per  cent,  whereas  subsequent  invest- 
ments of  capital  yield  decreasing  returns,  until  we  find  that 
the  best  rate  the  capitalist  can  obtain  for  additional  capital 
is  three  per  cent,1  because  no  entrepreneur  is  willing  to  pay 
more  for  its  use  under  existing  conditions  of  production. 

1  This  must  not  be  supposed  to  imply  that  the  supply  of  capital  necessarily 
increases  more  rapidly  than  the  new  opportunities  for  its  investment,  and  that 
therefore  the  rate  of  interest  is  bound  to  fall  continually.  (See  the  next  sec- 
tion.) This  may  or  may  not  be  the  case.  In  a  progressive  nation  it  is  not 
unlikely  that  possibilities  of  new  and  more  profitable  investments  for  capital 
will  be  offered  from  time  to  time.  If  this  be  the  case,  and  the  supply  of 
capital  fails  to  increase  rapidly  enough  to  permit  carrying  on  all  the  old  as 
well  as  all  the  new  enterprises,  capital  will  be  removed  from  some  of  the 
former  to  the  latter ;  hence  the  marginal  utility  of  capital  (the  productivity 
of  the  increment  of  capital  which  is  applied  least  productively,  but  which 
the  owner  nevertheless  continues  to  apply)  may  be  greater  than  before,  and 
thus  cause  a  rise  in  the  rate  of  interest. 

The  important  point  is  that  some  capital  is  less  productively  employed  than 
all  the  rest.  Yet  interest  must  be  paid  for  it ;  and  as  there  can  be  but  one 
price  for  all  the  increments  of  a  uniform  commodity,  i.e.  one  rate  of  interest 
for  capital  in  genere,  this  rate  will  be  that  paid  for  the  capital  engaged  least 
productively,  whether  it  be  "old"  or  "  new.'1 


576  PKINCIPLES   OF   POLITICAL   ECONOMY 

New  capital,  if  invested  at  all,  will  have  to  be  invested  at 
this  rate.  But  will  those  entrepreneurs  who  borrowed  capital 
at  ten  per  cent  continue  to  pay  this  interest  for  a  commodity 
now  obtainable  at  three  per  cent  ?  Evidently  not ;  and  there- 
fore, sooner  or  later,  all  capitalists  will  have  to  be  satisfied 
with  three  per  cent.  As  Roscher  puts  it,  the  rate  of  interest 
is  determined  by  the  "return  from  the  least  productive 
application  of  capital  which  must  nevertheless  be  made  in 
order  to  find  investment  for  all  the  capital  that  seeks  it"; 
or  as  Von  Thuenen,  the  acknowledged  founder  of  this  law, 
formulated  it,  interest  is  determined  by  the  return  secured 
"from  the  last  increment  of  capital  that  is  employed 
productively." 

Interest  resembles  wages  and  rent  in  the  respect  that  the 
lender  of  capital,  as  well  as  the  laborer  and  the  landlord,  con- 
tracts for  a  specific  sum,  agreed  on  in  advance  and  in  no  wise 
influenced  by  the  outcome  of  the  productive  enterprise  in 
which  his  goods  or  services  are  applied.  In  return  for  a  fixed 
annuity,  expressed  in  per  cent  of  the  sum  loaned  (which  is 
called  the  "  principal "),  the  capitalist  relinquishes  all  claim 
to  a  share  in  the  profits  of  the  enterprise. 

There  are,  however,  lenders  who  would  rather  share  the 
chances  of  profit  and  loss  in  an  enterprise  than  be  satisfied 
with  a  fixed  but  sure  compensation.  For  such  as  these, 
modern  credit  has  devised  an  arrangement  by  which  the 
borrower,  instead  of  guaranteeing  a  fixed  return,  agrees  to 
pay  the  lender  a  share  of  the  profits  if  there  are  any,  or  pay 
nothing  at  all  if  there  is  no  surplus  above  costs.  If  there 
are  actual  losses,  these  are  met  with  the  creditor's  capital. 
Under  this  arrangement  the  credit  instruments  owned  by 
the  lender  do  not  belong  to  the  category  of  bonds  or  notes, 

1  A  statement  of  Von  Thuenen's  theory  may  be  found  in  Boehm-Bawerk's 
"  Capital  and  Interest,"  and  in  an  essay  on  "  Thuenen's  Wertlehre  "  by  the 
translator  of  this  volume.  A  later  form  of  the  same  theory,  developed  by 
Professor  J.  B.  Clark,  is  summarized  and  criticised  by  Macfarlane  in  "  Value 
and  Distribution." 


THE   RATE   OF   INTEREST  577 

but  are  called  shares  of  stock,  and  the  income  derived  there- 
from is  not  called  interest,  but  dividends.  Dividends  should, 
of  course,  be  greater  than  interest,  because  they  constitute  a 
more  hazardous  kind  of  income  and  partake  of  the  nature  of 
profits.  We  shall  again  discuss  this  subject  when  we  take 
up  Profits. 

V.  Does  the  Rate  of  Interest  tend  to  Fall? 

If  it  be  desirable  that  wages  shall  increase,  it  .is,  on  the 
other  hand,  equally  desirable  that  the  rate  of  interest  shall 
fall. 

This  is  desirable,  first,  from  the  standpoint  of  distribution. 
It  would  reduce  the  share  of  the  total  product  that  is  appro- 
priated by  capitalists  as  such,  and  would  thus  increase,  by 
so  much,  the  share  that  may  go  to  the  other  participants 
in  production,  including  the  laborer.  Besides,  the  rate  of 
interest  determines  not  only  the  income  of  capitalists ; 
indirectly,  it  also  influences  profits,  the  rent  of  buildings, 
and  even  the  rent  of  land ;  in  other  words,  it  affects  the 
entire  income  of  the  propertied  classes. 

It  is  desirable,  secondly,  from  the  standpoint  of  produc- 
tion. By  constantly  lowering  the  cost  of  getting  capital, 
and  thus  diminishing  the  cost  of  production,  it  facilitates 
the  completion  of  enterprises  that  are  otherwise  impos- 
sible. Here,  let  us  say,  is  a  piece  of  land  that  needs  to 
be  cleared,  or  houses  that  ought  to  be  built  to  provide 
homes  for  workingmen;  but  everybody  knows  that  neither 
the  land  nor  the  houses  would  yield  more  than  three  per 
cent.  If,  therefore,  the  current  rate  of  interest  is  five  per 
cent,  it  will  be  impossible  to  find  capital  for  these  undertak- 
ings, inasmuch  as  they  can  be  carried  out  only  at  a  loss. 
Hence  they  will  not  be  attempted.  But  suppose  the  rate  of 
interest  falls  to  two  per  cent.  We  should  immediately  push 
forward  the  execution  of  these  enterprises.  Turgot,  in  a 
celebrated  figure,  compared  a  fall  in  the  rate  of  inter- 


578  PRINCIPLES   OF   POLITICAL  ECONOMY 

est  to  a  falling  sea-level,  which  makes  it  possible  to  bring 
more  land  under  cultivation. 

But  it  is  not  sufficient  to  show  the  desirability  of  a  fall  in 
the  rate  of  interest.  We  must  ask  whether  it  is  likely  to 
occur.  Is  it  of  a  permanent  nature  ?  Can  it,  moreover,  be 
regarded  as  a  true,  natural,  economic  law,  like  that  of  the 
increasing  value  of  land  or  even  that  of  the  decreasing  value 
of  metallic  money  ? 

Political  economists,  especially  those  of  the  French  opti- 
mistic school,  from  Turgot  down  to  Leroy-Beaulieu,  have 
answered  these  questions  affirmatively.  Bastiat  regarded 
the  law  of  a  falling  rate  of  interest  as  among  the  most  re- 
markable of  "economic  harmonies." 

This  opinion  is  defended  both  by  theory  and  fact.  We 
shall  briefly  state  the  considerations  in  its  favor. 

As  a  matter  of  fact,  there  has  been  a  noteworthy  decline  in 
the  rate  of  interest ;  it  has  fallen  during  the  past  thirty  or 
forty  years  from  six  and  seven  to  three  and  four  per  cent. 
This  is  one  of  the  most  characteristic  economic  phenomena 
of  the  second  half  of  the  nineteenth  century. 

The  theoretical  argument  is  that  in  a  progressive  country, 
capital,  like  all  kinds  of  artificial  wealth,  will  constantly 
grow  more  and  more  abundant,  and  that  its  final  utility 
and  value  must  consequently  continue  to  decrease.  The 
security  of  investments,  moreover,  is  constantly  increasing, 
at  least  if  we  admit  that  progress  means  greater  faithfulness 
on  the  part  of  individuals  in  the  fulfilment  of  business  engage- 
ments, and,  on  the  part  of  governments,  more  effective  means 
of  enforcing  credit  claims.  If,  therefore,  capital  is  becoming 
more  abundant,  and  investments  are  becoming  more  secure, 
there  are  grounds  for  believing  that  capital  will  become  less 
productive  and  bring  less  revenue  to  its  owners.  There  are 
valid  reasons  for  believing  that  the  returns  from  agriculture 
will  decrease  by  virtue  of  the  law  of  diminishing  returns, 
while  those  of  industry  and  transportation  will  decrease 
because  the  opportunities  for  the  employment  of  capital  in 


THE  FALLING   RATE   OF  INTEREST  579 

these  branches  are  limited.  It  is,  for  example,  undeniable 
that  the  railroads  still  to  be  built  in  this  country  will  be 
much  less  productive  than  the  great  lines  already  con- 
structed. Thus,  of  all  the  factors  that  must  be  taken 
into  account,  there  is  not  one  that  does  not  lead  us  to  expect 
a  permanent  and  continual,  although  perhaps  a  gradual,  fall 
in  the  rate  of  interest. 

There  would  even  appear  to  be  no  assignable  limit  to 
this  decline  ;  for  there  is  here  no  minimum  limit  such  as  that 
which  we  encounter  in  the  case  of  commodities,  —  the  value 
of  which  cannot  long  remain  below  the  cost  of  production,  — 
or  in  the  case  of  wages,  —  which  cannot  fall  below  the  cost 
of  the  laborer's  subsistence.  The  sole  minimum  limit  to  the 
rate  of  interest  is  that  below  which  the  capitalist  would  be 
unwilling  to  lend,  and  would  prefer  either  to  hoard  or  to  con- 
sume his  capital.  Now  what  is  the  rate  below  which  he  would 
prefer  either  to  spend  his  savings  or  keep  them  under  lock 
and  key  ?  Is  it  one  per  cent  or  one  per  thousand  ?  This  is 
a  question  that  no  one  can  answer.1 

These  are  the  arguments  of  those  who  prophesy  a  constant 
decline  in  the  rate  of  interest ;  but  none  of  them,  in  our 
opinion,  is  conclusive. 

In  fact,  the  very  suddenness  and  extent  of  the  decline 
which  the  rate  of  interest  for  money  has  undergone  in  less 
than  a  generation  is  sufficiently  indicative  that  this  is  not  one 

1  Bastiat  declares  that  interest  may  fall  below  any  assignable  quantity, 
without,  however,  reaching  zero, — thus  resembling  the  curves,  known  to 
mathematicians  as  asymptotic,  which  continually  approach  a  straight  line 
without  ever  touching  it.  Mr.  Foxwell,  an  English  economist,  has  even  gone 
so  far  as  to  assert  that  the  time  will  come  when  capitalists,  instead  of  receiving 
interest  from  those  to  whom  they  intrust  their  money,  will  pay  them  for 
keeping  it.  This  would  mean  the  realization  of  Proudhon's  dream  of 
"gratuitous  credit,"  which  has  been  so  thoroughly  ridiculed. 

It  is  only  fair  to  add  that  Mr.  Foxwell  refers  especially  to  loans  made  to 
banks  in  the  shape  of  deposits.  And  in  this  case  it  is  quite  possible  that,  in 
consideration  of  the  service  which  they  render  depositors,  banks  may  not 
only  pay  no  interest,  but  exact  the  payment  of  a  compensation  for  safe-keep- 
ing. This  was  what  they  did  formerly. 


580  PRINCIPLES   OF   POLITICAL   ECONOMY 

of  those  great  historical  changes  that  constitute  economic 
evolution,  but  a  temporary  and  probably  periodic  oscillation. 
History,  indeed,  confirms  this  supposition.  Under  the  Roman 
Empire  the  rate  of  interest  was  no  higher  than  in  the  middle 
of  the  nineteenth  century;  and  in  the  eighteenth  century  in 
Holland  it  fell  as  low  as  it  is  to-day.  The  present  period 
of  decline,  moreover,  seems  already  to  be  at  an  end  ;  for 
since  1899  there  has  been  a  noticeable  rise  in  the  rate  of 
interest,  or  (what  amounts  to  the  same  thing)  in  the  rate  of 
capitalization  for  the  principal  kinds  of  investments. 

The  prophecies  regarding  a  decrease  in  the  risks  incurred 
by  capitalists  and  the  diminished  productivity  of  capital  are 
of  doubtful  validity.  Consider,  first,  the  risks  of  investment. 
Can  it  be  said  that  there  are  to-day  fewer  insolvent  debtors, 
fewer  business  failures,  fewer  enormous  swindles,  smaller 
amounts  of  capital  sunk  in  hazardous  enterprises,  than 
formerly?  Are  we  justified,  then,  in  concluding  that  things 
will  be  different  in  the  future  ? l 

With  regard  to  the  productivity  of  capital  it  is  certain 
that  if  we  consider  a  particular  industry,  such  as  that  of 
railroad  transportation  or  gas  illumination,  there  is  a  limit 
to  its  development.  But  we  must  consider  production  in 
general,  and  note  that  old  industries  are  constantly  making 
room  for  new  ones.  Nothing  sanctions  the  assumption,  for 
instance,  that  transportation  by  balloon  will  not  be  as  re- 
munerative as  transportation  by  railroads,  or  that  illumina- 
tion by  electricity  or  acetylene  will  be  less  profitable  than 
illumination  by  gas.2 

1  "We  must  even  take  into  account  some  new  risks,  such  as  that  due  to 
strikes,  and  consider  the  increasing  burdens  which  the  laws  tend  to  impose 
upon  employers,  capitalists,  and  landlords. 

2  Professor  Paul  Leroy-Beaulieu,  the  most  ardent  advocate  of  the  doctrine 
of  a  continual  decline  in  the  rate  of  interest,  develops  the  productivity  argu- 
ment in  great  detail,  and  attaches  great  importance  to  it ;  yet  this  argument, 
founded  in  the  last  analysis  on  a  pessimistic  idea, — that  of  an  unavoidable 
limit  to  the  progress  of  human  industry,  —  does  not  seem  to  harmonize  very 
well  with  the  optimistic  views  held  by  this  author  with  regard  both  to  pro- 


GRATUITOUS   CREDIT  581 

In  short,  what  seems  to  us  most  likely  is  that  the  rate  of 
interest  will  rise  again,  after  having  reached  a  certain  mini- 
mum level  which  we  are  doubtless  not  far  from  having 
attained.  The  reaction,  in  fact,  has  already  begun.  It  is 
probable  that  in  the  future  the  rate  of  interest  will  pass 
through  long  alternating  periods  of  rise  and  fall,  just  as  it 
has  done  in  the  past. 

A  steady  and  uninterrupted  decline  in  the  rate  of  interest 
might  be  brought  about,  and  Proudhon's  dream  of  gratuitous 
credit  realized,  not  through  the  operation  of  supposed  natu- 
ral laws  concerning  this  matter,  but  through  the  rational 
and  persevering  effort  of  men  combined  into  mutual  credit 
associations.1  This  would,  indeed,  be  a  most  sensible  form 
of  collectivism ;  for  if  everybody  could  obtain  the  use  of 
capital  almost  gratuitously,  what  would  be  the  objection  to 
the  individual  ownership  of  capital  ? 

duction  and  to  distribution.  This  contradiction  is  revealed  in  a  curious 
manner  by  the  fact  that  Leroy-Beaulieu,  who  alleges  the  decreasing  pro- 
ductivity of  capital,  refuses  to  admit  the  law  of  diminishing  returns  in 
agriculture,  and  rebukes  Ricardo  and  Mill  for  accepting  it. 

1  Consider  in  this  connection  the  organization  of  Raiffeisen  banks,  dis- 
cussed on  page  395. 


CHAPTER  III  — THE  RENT   OF  LAND 
I.    The  Law  of  Rent 

DOES  land  yield  a  revenue  ?  The  question  seems  almost 
absurd.  It  is  a  self-evident  truth  that  all  land,  except  under 
abnormal  circumstances,  yields  something ;  and  if  any  proof 
of  this  were  needed,  the  fact  that  land  may  be  sold  or  rented 
ought  to  be  sufficient,  for  it  is  plain  that  land  would  find  no 
tenant  or  purchaser  (except  for  purposes  of  pleasure)  if  it 
yielded  no  return. 

But  that  is  not  the  real  question.  We  want  to  know 
whether  there  is  a  surplus  income  that  is  peculiar  to  the 
land,  separate  and  distinct  from  the  return  for  labor  and  the 
return  for  the  use  of  capital. 

Some  economists  deny  the  existence  of  such  a  separate 
and  distinct  return.  They  maintain  —  we  shall  see  how 
they  try  to  prove  it  —  that  the  revenue  from  land  is  nothing 
but  the  product  of  capital  put  into  the  land  by  its  owner  or 
his  predecessors  ;  and  that  in  the  last  analysis  the  return 
from  land  is  necessarily  made  up  of  wages,  interest,  and 
profit.  But  this  theory  is  not  generally  accepted ;  it  seems 
to  be  inspired  primarily  by  a  desire  to  justify  and  defend 
private  property  in  land. 

The  classical  economists  looked  at  this  matter  differently. 
The  Physiocrats,  and  even  Adam  Smith  and  J.  B.  Say,  re- 
garded the  return  from  land  as  really  due  to  natural,  pro- 
ductive qualities  of  the  soil ;  and  if  the  landlord  profits  by 
these  qualities,  this  is  simply  because  property  in  land  con- 
stitutes a  genuine  monopoly,  a  privilege  which  gives  him 
control  of  the  forces  of  nature  and  the  fruitfulness  of  the 

582 


RICARDO'S   THEORY    OF   RENT  583 

soil.  They  defended  this  monopoly,  moreover,  on  grounds 
of  public  utility  which  we  shall  examine  presently. 

The  landlord  may  either  take  advantage  of  this  natural 
source  of  wealth  himself,  by  selling  the  products  of  the  land, 
or  he  may  transfer  the  privilege  of  exploitation  to  some  one 
else  in  exchange  for  a  regular  nuJhey-payment  resembling 
that  received  by  the  capitalist  for  the  use  of  his  capital. 

This  explanation  of  the  revenue  from  land  implies  the 
idea  that  nature  can  create  value;  it  implies  adherence  to 
the  doctrine  that  value  is  based  on  utility  —  in  the  material 
sense  of  this  term.1 

Such  an  explanation  could  not  satisfy  the  acute  mind  of 
Ricardo.  We  know  that  this  great  economist  was  the  prin- 
cipal author  of  the  theory  according  to  which  value  depends 
on  labor  and  the  cost  of  production.  Therefore  he  could 
not,  on  the  one  hand,  without  demolishing  this  whole  theory, 
admit  that  the  value  of  land  or  of  its  products  is  created 
partly  by  nature.  Nor  could  he,  on  the  other  hand,  hold 
that  the  return  from  land  represented  nothing  more  than 
the  labor  of  cultivation;  for  everybody  knew  that  land, 
especially  in  England,  could  be  hired  to  tenants,  who,  after 
paying  rent  for  it  out  of  the  product  of  the  soil,  still  had 
enough  left  to  live  on  and  to  pay  all  the  expenses  of 
cultivation.  In  order  to  escape  this  dilemma,  Ricardo  in- 
vented his  celebrated  theory  of  land-rent,  which  has  served 
for  more  than  half  a  century  as  the  subject  of  innumerable 
discussions  among  economists. 

Originally,  says  Ricardo,  as  men  were  obliged  to  cultivate 
only  a  small  section  of  land,  they  chose  the  best  plots.2 

1  This  was  evidently  Adam  Smith's  meaning  when  he  said:   "In  agri- 
culture, nature  labors  along  with  man;"   the  share  due  to  her  help  "is 
seldom  less  than  a  fourth,  and  frequently  more  than  a  third,  of  the  whole 
produce." 

2  At  the  risk  of  tedious  repetition,  we  here  quote  Ricardo's  own  words 
concerning  the  fundamental  part  of  his  theory. 

"  On  the  first  settling  of  a  country,  in  which  there  is  an  abundance  of 
rich  and  fertile  land,  a  very  small  proportion  of  which  is  required  to  be  cul^ 


584  PRINCIPLES    OF   POLITICAL   ECONOMY 

Still,  despite  the  fertility  of  these  plots,  their  cultivation  did 
not  yield  a  greater  income  than  could  have  been  obtained 
from  any  other  employment  of  labor  and  capital ;  as  there 
was  plenty  of  land  to  be  had  for  the  taking,  land  and  its 
products  were  subject  to  the  law  of  competition,  which  re- 
duces the  value  of  all  commodities  to  the  level  of  the  cost 
of  production. 

But  the  increase  of  population  necessitates  an  increase  of 
production;  and  when  all  the  land  of  the  first  quality  has 
been  appropriated,  less  fertile  land  must  be  put  under  cultiva- 
tion ;  that  is  to  say,  land  on  which  the  cost  of  production  is 
higher.  Let  us  suppose  that  land  of  the  first  degree  yields 
30  bushels  of  wheat  per  acre,  at  an  outlay  of  $30,  or  fl 
per  bushel.  Then  land  of  the  second  degree  will  produce, 
let  us  say,  only  20  bushels  for  the  same  expenditure,  and 

tivated  for  the  support  of  the  actual  population,  or  indeed  can  be  cultivated 
with  the  capital  which  the  population  can  command,  there  will  be  no  rent ; 
for  no  one  would  pay  for  the  use  of  land,  when  there  is  an  abundant  quantity 
of  it  not  yet  appropriated,  and,  therefore,  at  the  disposal  of  whosoever  might 
choose  to  cultivate  it." 

"  On  the  common  principles  of  supply  and  demand,  no  rent  could  be  paid 
for  such  land,  for  the  reason  why  nothing  is  given  for  the  use  of  air  and 
water,  or  for  any  other  of  the  gifts  of  nature  which  exist  in  boundless  quan- 
tity." "  If  all  land  had  the  same  properties,  if  it  were  unlimited  in  quantity, 
and  uniform  in  quality,  no  charge  could  be  made  for  its  use,  unless  where 
it  possessed  peculiar  advantages  of  situation.  It  is  only,  then,  because  land 
is  not  unlimited  in  quantity  and  uniform  in  quality,  and  because  in  the 
progress  of  population,  land  of  an  inferior  quality,  or  less  advantageously 
situated,  is  called  into  cultivation,  that  rent  is  ever  paid  for  the  use  of  it. 
When,  in  the  progress  of  society,  land  of  the  second  degree  of  fertility  is 
taken  into  cultivation,  rent  immediately  commences  on  that  of  the  first  qual- 
ity, and  the  amount  of  that  rent  will  depend  on  the  difference  in  the  quality 
of  these  two  portions  of  land." 

"  With  every  step  in  the  progress  of  population  which  shall  oblige  a  coun- 
try to  have  recourse  to  land  of  a  worse  quality,  to  enable  it  to  raise  its  supply 
of  food,  rent,  on  all  the  more  fertile  land,  will  rise." 

"The  exchangeable  value  of  all  commodities  [and  therefore  the  price  of 
agricultural  products]  is  always  regulated  by  those  who  continue  to  produce 
them  under  the  most  unfavorable  circumstances ;  meaning,  by  the  most 
unfavorable  circumstances,  the  most  unfavorable  under  which  the  quantity 
of  produce  required  renders  it  necessary  to  carry  on  the  production." 


RICARDO'S   THEORY   OF   RENT  585 

the  cost  of  production  per  bushel  will  be  $1.50.  It  is  clear 
that  the  owners  of  this  land  will  not  be  able  to  sell  their 
wheat  for  less  than  $1.50,  for  any  lower  price  than  this 
would  involve  loss,  and  they  would  cease  raising  wheat. 
We  assume,  however,  that  the  population  cannot  get  along 
without  them.  It  is  equally  clear  that  those  who  produce 
on  land  of  the  first  degree  will  not  consent  to  sell  their  wheat 
at  a  lower  price  than  their  neighbors.  They,  too,  will  sell 
it  at  $1.50  per  bushel.  But  as  it  still  costs  only  $1  to  pro- 
duce, they  will  now  realize  a  gain  of  50  cents  per  bushel,  or 
$10  per  acre ;  and  this  gain  is  precisely  what,  in  Ricardo's 
theory  and  in  the  recognized  vocabulary  of  political  economy, 
is  called  rent. 

At  a  later  stage,  as  population  continues  to  grow  and  to 
require  an  increased  supply  of  the  means  of  subsistence,  men 
are  obliged  to  cultivate  lands  of  even  inferior  quality,1  — 
lands,  for  example,  that  will  yield  only  15  bushels  of  wheat 
per  acre.2  This  means  an  outlay  of  $2  per  bushel.  For 

1  Or,  lands  of  inferior  accessibility.     Given,  two  farms  of  uniform  fertility 
(whose  product  is  necessary  to  satisfy  the  demand  for  wheat  in  a  given  com- 
munity), one  of  which  is  twice  as  faraway  from  the  market  as  the  other,  so 
that  the  cost  of  transporting  a  bushel  of  wheat  from  one  to  the  market 
is  50  cents  more  than  when  the  wheat  is  brought  from  the  other  farm  ;  here, 
clearly,  the  second  farm  has  an  advantage  involving  the  same  consequences 
as  greater  fertility. 

Differences  in  accessibility  may  be  quite  as  important  as  differences  in 
fertility.  Especially  in  the  case  of  land  in  or  near  cities,  this  is  an  important 
element  even  for  agricultural  purposes.  Although  Ricardo  saw  its  impor- 
tance, von  Thuenen  was  apparently  the  first  author  to  appreciate  its  full 
significance  and  fully  to  discuss,  in  connection  with  accessibility  and  rent, 
the  influence  of  transportation  facilities. 

2  Why  is  it  assumed  that  men  will  be  obliged,  in  order  to  increase  produc- 
tion, to  bring  new  land  under  cultivation  ?    Can  they  not  increase  the  output 
by  applying  better,  more  intense  methods  to  the  good  land  already  cultivated  ? 
There  is  no  doubt  that  they  can.    But,  by  virtue  of  the  law  of  diminishing 
returns,  every  increase  in  the  yield,  beyond  a  certain  limit,  means  more  than 
proportionate  increase  of  outlay,  and  will  consequently  involve  a  rise  in  the 
cost  of  production.     Take  the  land  yielding  30  bushels  at  an  outlay  of  $30 
per  acre.     We  might,  perhaps,  succeed  in  getting  60  bushels  per  acre  out  of 
this  land,  but  it  would  mean  an  expenditure  of  $80  or  $90,  —  certainly  more 


586  PRINCIPLES   OF  POLITICAL   ECONOMY 

reasons  stated  above,  this  will  be  the  price  for  all  the  wheat 
on  the  market.  Henceforward  the  owners  of  land  of  the 
first  category  will  have  a  surplus  or  rent  of  $1  per  bushel,  or 
$30  per  acre,  and  the  owners  of  land  of  the  second  category 
will  begin  to  receive  a  surplus  or  rent  of  50  cents  per  bushel, 
or  $  10  per  acre. 

This  "  order  of  cultivation,"  as  Bicardo  calls  it,  may  go  on 
indefinitely,  always  causing  a  rise  in  the  price  of  food,  to  the 
detriment  of  consumers,  and  an  increase  in  rent,  to  the  bene- 
fit of  landlords  whose  income  is  augmented  without  any 
effort  on  their  part,  and  whose  prosperity  has  its  source  in 
the  impoverishment  of  the  rest  of  the  community.1 

In  Ricardo's  theory  we  must  take  it  for  granted  —  and 
this  assumption  has  given  rise  to  numerous  objections  — 
that  there  is  always  some  land  for  which  no  rent  is  paid  in 
the  strict  sense  of  the  term,  i.e.  land  which  yields  no  return 
except  for  the  capital  and  labor  expended  on  it.  This  is  the 
land,  however,  that  plays  a  decisive  part  in  the  determination 
of  rent,  inasmuch  as  it  serves  as  the  standard,  as  the  basis  of 
comparison  with  other  lands.  The  income  of  all  these  other 

than  $60, — and  the  cost  of  production  would  rise  to  $1.30  or  $1.50  per 
bushel.  The  ultimate  result  would  thus  be  the  same  whether  we  bring  new 
land  under  cultivation  or  apply  a  more  careful  'and  costlier  system  of  agri- 
culture to  the  old  land. 

In  this  connection  the  section  on  the  Law  of  Diminishing  Returns  should 
be  re-read  (page  92). 

1  Ricardo's  whole  theory  was  aimed,  in  the  opinion  of  Professor  S.  N. 
Patten  (who  has  made  a  careful  study  of  the  work  of  the  English  economist), 
at  the  controlling  political  power  of  British  landlords  three-fourths  of  a  cen- 
tury ago.  "Nothing,"  says  Ricardo,  "is  more  common  than  to  hear  of  the 
advantages  which  the  land  possesses  over  every  other  source  of  useful  pro- 
duce, on  account  of  the  surplus  which  it  yields  in  the  form  of  rent.  Yet 
when  land  is  most  abundant,  when  most  productive,  and  most  fertile,  it 
yields  no  rent ;  and  it  is  only  when  its  powers  decay,  and  less  is  yielded  in 
return  for  labor,  that  a  share  of  the  original  produce  of  the  more  fertile 
portions  is  set  apart  for  rent.  It  is  singular  that  this  quality  in  the  land, 
which  should  have  been  noticed  as  an  imperfection,  compared  with  the 
natural  agents  by  which  manufactures  are  assisted,  has  been  pointed  out  as 
constituting  its  peculiar  pre-eminence." 


KENT   AND   PRICES  587 

lands  is  due,  not  precisely  to  their  fertility  (for  if  each  plot 
were  alone  under  cultivation,  not  even  the  most  fertile  would 
yield  a  surplus,  for  the  reasons  that  we  have  stated),  but  to 
their  relative  fertility,  i.e.  to  the  comparative  barrenness  of 
competing  lands ;  rent  is  not  due  to  the  generosity  of  nature, 
but  to  her  niggardliness.  The  owner  of  a  fertile  plot  of  land 
occupies  a  privileged  position.  He  enjoys,  as  it  were,  a 
monopoly ;  but  a  monopoly  of  a  peculiar  kind,  which  does 
not  consist  in  being  able  to  sell  above  the  market  price,  but 
in  being  able  to  produce  cheaper  than  the  market  price.  It 
may  be  objected  that  this  is  a  distinction  without  a  difference. 
But  this  objection  is  not  valid ;  for  while  the  ordinary  mo- 
nopolist causes  a  disadvantage  to  the  public  by  screwing  up 
prices,  the  landlord  who  receives  rent  must  abide  by  the 
price  fixed  in  the  market  by  forces  that  are  beyond  his  control. 
Even  if  a  spirit  of  generosity  should  prompt  all  the  owners 
of  wheat  farms  to  relinquish  their  rent,  the  current  price  of 
wheat  would  not  fall  one  cent ;  such  conduct  would  simply 
amount  to  a  gift  to  their  tenants  or  those  who  happened  to 
buy  the  wheat  first.1 

In  other  words,  prices  are  not  high  because  rent  is  paid, 
but  rent  is  paid  because  prices  are  high.  Rent  is  not  the 
cause,  but  the  effect  of  the  price.2 

1  In  this  statement  we  have  in  mind  the  present  system  of  private  prop- 
'erty  ;  for  things  would  be  different  under  a  system  of  common  ownership. 
If  society  collectively  owned  all  the  land,  it  would  be  possible  to  establish 
an  average  price  somewhat  lower  than  the  cost  of  production  on  the  poorer 
lands  and  somewhat  higher  than  that  on  the  better  lands,  thus  balancing  the 
losses  on  the  former  by  the  gains  on  the  latter  in  such  a  way  as  just  to  cover 
the  total  costs.     It  cannot  be  denied,  on  theoretical  grounds,  that  this  would 
mean  a  reduction  of  the  price. 

2  Says  Ricardo  :  "  Corn  is  not  high  because  a  rent  is  paid,  but  a  rent  is 
paid  because  corn  is  high." 

The  same  idea  may  be  expressed  by  the  celebrated  formula :  Sent  is  not 
part  of  the  cost  of  production.  Wages  and  interest  alone  constitute  the  cost 
of  production ;  indirectly,  under  the  pressure  of  free  competition,  they  consti- 
tute the  value  of  the  product. 

From  this  theory  the  interesting  conclusion  is  drawn  that  one  might  confis- 
cate the  entire  rent  of  land  by  taxation,  without  affecting  the  price  of  cereals. 


588  PRINCIPLES   OF   POLITICAL   ECONOMY 

This  theory  of  land-rent  is  now  somewhat  out  of  favor. 
Economists  of  the  liberal  school  regard  it  as  dangerous  to 
the  right  of  private  property,  whereas  socialists  find  it  too 
pessimistic  with  regard  to  the  future  of  production. 

Yet  we  must  accept  the  theory  as  true  in  its  general  fea- 
tures, —  except  the  historical  order  of  cultivation,  which  seems 
to  be  an  a  priori  hypothesis.  Although  Ricardo  regarded 
this  "  order  "  as  the  very  basis  of  his  theory,  it  is  by  no  means 
an  essential  part  of  it.1 

Here,  let  us  say,  are  a  hundred  bushels  of  wheat  offered 
for  sale  in  any  European  market.  It  is  clear  that  they  have 
not  all  been  produced  under  the  same  conditions.  Some  of 
the  wheat  was  raised  with  the  help  of  much  fertilizer  and 
intense  labor ;  some  of  it  grew  on  fertile  land  almost  of  its 
own  accord.  Some  of  it  came  from  San  Francisco,  after 
passing  round  Cape  Horn ;  the  rest  of  it,  possibly,  came 
from  a  near-by  farm.  If  each  bushel,  therefore,  bore  a 
label  indicating  its  cost  of  production,  there  would  probably 
not  be  two  bushels  bearing  the  same  figures.  Their  original 
cost  of  production  might  easily  range,  for  example,  from  25 
cents  to  $2. 

But  we  know,  on  the  other  hand,  that  for  goods  of  the 
same  kind  there  can  only  be  one  and  the  same  price.  (See 
page  187.)  The  price  of  all  the  wheat  must  there- 

1  By  a  theory  which  is  diametrically  the  opposite  of  Ricardo's,  and  which 
was  celebrated  for  a  time,  the  American  economist  Henry  C.  Carey  at- 
tempted to  show  that  the  "order  of  cultivation"  is  precisely  the  inverse 
of  that  laid  down  by  Ricardo.  The  most  fertile  lands,  says  Carey,  are  those 
most  difficult  to  clear  because  of  this  very  fertility,  which  results  in  exuber- 
ant vegetation,  huge  forests,  and  marshes  giving  rise  to  miasma  and  fevers. 
The  best  lands  cannot,  therefore,  be  brought  under  cultivation  until  agricul- 
ture has  made  considerable  progress  and  is  in  possession  of  powerful  instru- 
ments and  advanced  methods. 

This  theory  is  true  for  a  young  nation.  It  was  true  for  the  United  States 
at  the  time  Carey  propounded  it.  It  is  no  longer  applicable  to  the  United 
States  of  to-day,  and  it  ceased  many  centuries  ago  to  be  applicable  to  Euro- 
pean nations.  It  would  be  absurd  now  to  maintain  that  the  most  fertile 
land  in  France  or  England  is  that  which  still  remains  to  be  cultivated. 


THE   PECULIARITY    OF    RENT  589 

fore  be  the  same.  How,  then, —  the  cost  of  production  being 
different  in  each  case,  and  the  selling-price  being  the  same, 
—  is  the  connection  established  between  the  uniform  selling- 
price  and  the  cost  of  production  ? 

The  answer  is  this :  The  selling-price  coincides  with  the 
cost  of  production  only  in  the  case  of  that  bushel  of  wheat 
which  cost  most  to  produce.  In  the  example  chosen  above, 
this  would  be  the  bushel  that  cost  $2.  The  reason  for  this 
is  plain.  The  selling-price  must  be  at  least  sufficient  to 
cover  the  expense  of  production  borne  by  the  unfortunate 
seller  who  raised  his  wheat  under  the  most  unfavorable  con- 
ditions of  production ;  for  if  it  were  not  so,  this  producer 
would  no  longer  raise  wheat  for  the  market;  and,  as  we 
assume  that  the  quantity  of  wheat  is  not  greater  than  the 
effectual  demand  for  it,  it  would  be  impossible  to  dispense 
with  this  last  producer. 

We  may  therefore  formulate  this  proposition  :  — 

Whenever  like  products  are  sold  in  the  same  market,  the 
value  of  all  tends  to  coincide  with  the  maximum  cost  of  pro- 
duction. 

Now  it  is  plain  that  this  price  of  $2  will  mean  a  gain  for 
all  wheat-producers  whose  cost  of  production  is  less  than 
this  amount ;  a  gain  of  $1  for  him  whose  wheat  cost  $1  to 
produce,  of  80  cents  for  him  whose  wheat  cost  $1.20,  of  50 
cents  for  him  whose  wheat  cost  $1.50,  —  and  so  forth. 
This  gain  or  surplus  is  called  rent,  in  the  economic  sense  of 
the  term.  It  is  of  a  peculiar  nature  that  distinguishes  it 
from  profit,  because,  on  the  one  hand,  it  is  wholly  beyond 
the  influence  of  competition,  and  because,  on  the  other 
hand,  it  is  due  to  forces  absolutely  independent  of  the  con- 
duct of  him  who  receives  it.  The  landlord  plays  a  purely 
passive  part ;  he  profits  by  circumstances,  but  does  not  create 
them.1 

1  It  was  Anderson,  a  Scotchman,  who  first  expounded  the  law  of  rent 
(1777).  But  Ricardo  has  taken  all  the  glory  of  its  discovery.  Both  of  them 
considered  it  applicable  only  to  agricultural  products,  but  it  really  constitutes 


590  PRINCIPLES   OF   POLITICAL   ECONOMY 

As  used  popularly,  the  term  rent  is  applied  to  what- 
ever is  annually  paid  to  a  landlord  by  his  tenant.  This  is, 
of  course,  a  much  wider  use  of  the  term  than  Ricardo  would 
sanction,  for  it  really  includes  other  elements  than  economic 
rent.1 

When  the  farmer  is  his  own  landlord,  there  is  no  regular 
payment  either  of  money  or  goods.  Yet  there  is  rent,  in  the 
economic  sense  of  the  term,  wherever  there  are  differences 
in  the  fertility  or  accessibility  of  land,  no  matter  whether 
or  not  the  land  is  owned  by  those  that  cultivate  it. 

II.   The  Unearned  Increment  of  Land 

Although  the  historical  "  order  of  cultivation  "  laid  down 
by  Ricardo  must  be  rejected,  the  essential  fact  which  this 

a  universal  economic  phenomenon.  Whenever  like  products  are  sold  at  the 
same  price,  rent,  which  is  really  simply  the  difference  between  the  cost  of 
production  and  the  selling-price,  goes  to  those  who  have  produced  goods 
under  favorable  circumstances. 

In  manufactures,  however,  this  phenomenon  occurs  only  temporarily, 
because  in  this  branch  the  most  favorably  situated  producers  are  able  to 
satisfy  the  whole  demand  by  increasing  their  output  indefinitely.  Instead  of 
utilizing  their  position  of  vantage  by  continuing  to  sell  at  the  old  prices, 
they  prefer  to  lower  prices,  undersell  their  competitors,  and  drive  them 
gradually  from  the  market.  They  thus  make  less  profit  on  each  article 
sold,  but  greater  total  profits.  (See  page  194,  note  1.) 

In  this  case  the  general  market  price  is  not  determined  by  the  maximum 
cost  of  production,  but  by  the  minimum  cost  of  production,  —  a  result  which 
constitutes  a  great  advantage  for  the  public. 

1  Ricardo  makes  this  clear  by  an  example.  If,  of  two  adjoining  farms  of 
the  same  extent  and  of  the  same  natural  fertility,  one  had  all  the  conven- 
iences of  farming  buildings,  and,  besides,  were  properly  drained  and  manured, 
and  advantageously  divided  by  hedges,  fences,  and  walls,  while  the  other 
had  none  of  these  advantages,  more  remuneration  would  naturally  be  paid 
for  the  use  of  one  than  for  the  use  of  the  other  ;  yet  in  both  cases  this  remu- 
neration would  be  called  rent.  But  it  is  evident  that  a  portion  only  of  the 
money  annually  to  be  paid  for  the  improved  farm  would  be  given  for  the 
natural  properties  and  advantages  of  the  soil ;  the  other  portion  would  be 
paid  for  the  use  of  the  capital  which  had  been  employed  in  ameliorating  the 
quality  of  the  land  and  in  erecting  such  buildings  as  were  necessary  to 
secure  and  preserve  the  produce. 


THE   UNEARNED   INCREMENT  591 

hypothesis  merely  served  to  emphasize,  viz.  the  spontaneous 
and  in  a  sense  inevitable  increase  in  the  value  of  land  and  in 
the  revenue  arising  therefrom,  nevertheless  remains  true. 
We  must  bear  in  mind  that  land  is  a  kind  of  wealth  sui 
generis,  and  has  three  characteristics  which  no  other  wealth 
possesses  in  the  same  degree.  These  are  :  — 

(1)  It  provides  for  the  satisfaction  of  human  wants  that 
are  essential  and  permanent. 

(2)  It  is  limited  in  quantity. 

(3)  It  lasts  forever. 

In  view  of  these  facts  we  can  easily  understand  why  the 
value  of  the  land  and  of  its  products  increases  constantly,  —  at 
least  in  a  progressive  society,  —  and  how  almost  all  the  forces 
of  economic  and  social  progress  contribute  to  its  increase. 

The  growth  of  population  is  the  principal  cause  of  increas- 
ing rent,  because  the  more  people  there  are,  the  greater  the 
quantity  of  food  that  the  land  must  produce  for  them,  and 
the  wider  the  area  they  will  require  to  live  upon.1  But  the 
general  accumulation  of  wealth,  the  building  of  highways 
and  railroads,  the  rise  of  great  cities,  and  even  the  develop- 
ment of  public  order  and  safety,  also  inevitably  contribute  to 
increase  that  surplus  value  of  land  which  English  economists 
designate  by  the  .significant  name  of  unearned  increment? 

1  Henry  George  lias  eloquently  developed  the  theory  that  the  value  of  the 
land  is  directly  proportionate  to  the  population  that  lives  upon  it. 

As  land  is  the  ultimate  source  of  nearly  all  raw  materials,  the  increased 
consumption  of  almost  any  kind  of  wealth  means  greater  demands  upon  the 
land.  Blatchford,  an  English  socialist,  puts  this  rather  forcibly  when  he 
says : — 

"All  wealth  comes  from  the  land  —  all  flesh  is  grass.  Vegetable  food 
comes  directly  from  the  land  ;  animal  food  comes  indirectly  from  the  land, 
all  animals  being  fed  on  the  land.  So  the  stuff  of  which  we  make  our  cloth- 
ing, our  houses,  our  fuel,  our  tools,  arms,  ships,  engines,  toys,  ornaments, 
is  all  got  from  the  land.  For  the  land  yields  timber,  metals,  vegetables,  and 
the  food  on  which  feed  the  animals  from  which  we  get  feathers,  fur,  meat, 
milk,  leather,  ivory,  bone,  glue,  and  many  other  things." 

2  Naturally  enough,  this  surplus  value  of  land  is  most  striking  in  new 
countries,  such  as  the  United  States,  because  in  these  countries  the  forces  to 


592  PRINCIPLES   OP   POLITICAL   ECONOMY 

There  are  but  two  factors  capable  of  arresting  the  increase 
of  rent  or  causing  it  actually  to  decrease. 

The  first  is  the  competition  of  new  lands,  which  may  take 
place  as  the  result  of  colonization  on  a  large  scale  or  great 
improvements  in  the  means  of  transportation.  This  factor 
is  now  operating  with  extraordinary  intensity.1  But  it 
must,  nevertheless,  be  regarded  as  a  mere  accident  in  eco- 
nomic evolution,  —  as  a  temporary  disturbing  element.  In 
the  second  half  of  the  nineteenth  century  so  much  new  and 
unoccupied  land  was  brought  under  cultivation  that  the 
supply  of  agricultural  products  exceeded  the  consumptive 
power  of  the  population.  But  this  state  of  affairs  cannot 
long  continue,  and  when  the  new  countries  will  be  more 
thickly  populated,  the  law  of  increasing  land-rent,  for  a  time 
suspended  in  its  operation,  will  again  go  into  force. 

The  second  factor  that  may  counteract  the  rising  tendency 
of  rent  is  a  great  and  sudden  improvement  in  the  methods  of 
farming.  This  is  the  most  paradoxical  as  well  as  a  most 
certain  consequence  of  Ricardo's  theory.  Without  accept- 
ing Ricardo's  assumption  that  improved  methods  would  lead 
to  the  abandonment  of  the  least  productive  farms,  we  can 
readily  see  that  all  progress  in  agriculture,  by  increasing 

which  we  have  referred  are  most  intense.  Many  of  the  fabulous  fortunes  of 
American  millionnaires  are  largely  due  to  the  unearned  increment  from  land. 

In  older  countries  where  these  forces  are  less  pronounced  and  the  increase 
of  population  is  less  rapid,  the  surplus  value  of  the  land  is  less  noticeable  ; 
yet  in  the  past  it  has  played  an  important  part. 

In  1800,  the  rent  of  land  in  England  was  calculated  to  be  $100,000,000, 
and  in  1880,  $300,000,000.  During  the  same  period,  the  population  of  Eng- 
land likewise  had  increased  to  three  times  what  it  was  in  1800.  But  the 
rent  (especially  of  agricultural  land)  has  certainly  fallen  considerably  since 
1880,  despite  the  continued  growth  of  the  English  population. 

1  Ricardo's  theory  is  by  no  means  overthrown  by  this  fact,  but  confirmed 
by  it ;  for  he  declares  expressly  that  there  will  be  no  rent  in  colonies  or  new 
countries.  The  competition  of  new  countries  and  of  colonies  is  precisely 
what  has  caused  a  temporary  pause  in  the  rise  of  rents  in  old  countries. 

It  should  be  noted,  however,  that  although  colonization  and  better  means 
of  transportation  make  rent  decline  in  old  countries,  they  make  it  increase 
rapidly  in  new  countries. 


THE   LEGITIMACY   OF   KENT  593 

the  supply  of  farm  products,  must  decrease  the  final  utility 
and  value  of  these  products,  and  therefore  lower  the  value  of 
the  land  itself. 

It  should  be  noted  that  neither  the  one  nor  the  other  of 
these  two  possible  causes  of  a  decline  in  rent  would  affect 
building  lots.  This  is  why  the  value  of  these  lots  has 
increased  so  astoundingly,  and  this,  too,  is  why  no  category 
of  private  expenditure  has  increased  more  rapidly  than  that 
for  the  rent  of  buildings.1 

III.   The  Legitimacy  of  the  Rent  of  Land 

If  we  accept  the  theory  that  has  just  been  explained,  it 
follows :  (a)  that  land-rent  is  the  result  of  a  kind  of  mo- 
nopoly ;  (5)  that  this  income  is  bound  to  increase  in  con- 
sequence of  social  forces  entirely  beyond  the  influence  of  the 
landlord. 

It  must  be  admitted  that  these  circumstances  do  not  speak 
in  favor  of  the  legitimacy  of  land-rent.  Yet  if  the  legitimacy 
of  private  property  in  land  is  firmly  established,  that  of  land- 
rent  would  necessarily  follow,  just  as  the  legitimacy  of 
interest  is  inseparable  from  that  of  private  property  in 
capital. 

But  if  we  turn  from  land-rent  to  property  in  land,  and 
examine  the  legitimacy  of  the  latter,  the  problem  is  no  nearer 
a  satisfactory  solution.  Not  only  does  land  present  the  three 
characteristics  sui  generis  which  we  enumerated  in  the  last 
section,  and  which  alone  would  suffice  to  make  the  justice  of 
property  in  land  questionable,  but,  above  all,  it  possesses 
the  unique  characteristic  of  not  being  a  product  of  labor.  All 
goods  are  the  product  of  labor,  except  land.2  Hence  if  we 
accept  the  theory  that  the  basis  of  property  is  labor,  we  must 

1  In  1895  a  small  building  lot  on  Lombard  Street  in  London  sold  for  $600 
per  square  foot. 

2  It  may  be  objected  that  a  diamond  is  not  the  product  of  labor.     This 
would  be  false,  for  a  diamond  has  no  value  unless  it  is  found  and  taken  out 
of  the  ground. 


594  PRINCIPLES   OF   POLITICAL   ECONOMY 

conclude  that  all  things  may  properly  come  under  private 
ownership,  except  land.1 

The  simplicity  and  logic  of  this  distinction  strongly  im- 
press the  mind.  It  is  of  ancient  date,  for  we  shall  presently 
see  that  it  can  be  traced  to  the  very  beginnings  of  property. 
It  is  also  a  modern  idea,  for  in  our  own  times  it  has  met 
with  the  approval,  not  only  of  socialists,  but  also  of  a  number 
of  contemporary  economists  and  philosophers. 

The  optimistic  school,  however,  absolutely  denies  this  dis- 
tinction, and  asserts  that  land  is  just  as  much  a  product  of 
the  farmer's  labor  as  the  clay  vase  fashioned  by  the  potter 
is  the  product  of  the  potter's  labor.  Man,  to  be  sure,  has 
not  made  the  land;  but  neither  has  he  made  the  clay. 
Labor,  in  fact,  never  creates  anything ;  it  simply  modifies 
the  materials  that  nature  provides.  Now  this  modifying 
influence  of  labor  is  no  less  real  or  effectual  when  applied 

1  Some  persons  have  endeavored  to  justify  the  private  ownership  and  rent 
of  land  by  the  following  childish  argument :  Property  in  land  is  legitimate 
because  all  land  has  been  bought,  i.e.  exchanged  for  money,  and  therefore 
the  rent  of  land  is  simply  the  interest  on  the  money  thus  invested. 

This  argument  entirely  misses  the  question.  A  piece  of  land  does  not 
yield  a  rent  of  $4000  because  it  was  bought  for  $100,000 ;  but  it  sells  for 
$100,000  because  it  will  yield  $4000  rent  independently  of  any  labor  on  the 
part  of  the  owner.  What  we  want  to  know  is  why  and  how  the  land  does 
this  !  The  above  argument  is  precisely  like  attempting  to  silence  those  who 
criticise  the  monopoly  of  money-changers  in  France,  by  saying  that  their 
right  to  this  position  is  legitimate  and  unquestionable  because  the  present 
incumbents  paid  for  it. 

The  only  valid  conclusion  that  we  can  draw  from  this  argument  is  that 
the  landowner  (like  the  holder  of  any  privilege  bought  with  money)  has  a 
right  if  the  land  is  taken  from  him  to  the  repayment  of  the  price  paid.  But 
this  is  an  entirely  different  question. 

Nor  has  prescription  (the  acquisition  of  property  by  immemorial  or  long- 
continued  and  uninterrupted  possession),  often  urged  as  justifying  private 
property  in  land,  any  better  validity.  In  some  particular  cases,  and  in  order 
to  avoid  lawsuits  impossible  to  decide,  jurists  have  determined  that  long 
possession  properly  leads  to  the  presumption  that  the  title  to  land  has  been 
lost  and  may  take  the  place  of  a  legal  title.  But  it  would  be  absurd  to  make 
this  proposition  general  and  to  declare  that  landed  property  in  general  is 
based  on  the  presumption  of  legal  titles  that  cannot  be  shown. 


LAND   AND   LABOR  595 

to  the  soil  itself  than  when  applied  to  the  materials  drawn 
from  the  earth's  bosom.  The  optimists  refer  us,  moreover, 
to  such  patches  of  land  as  those  which  peasants  of  the  Valais 
or  the  Pyrenees  have  literally  constructed  on  the  sides  of 
the  mountains  by  carrying  all  the  earth  for  that  purpose 
in  baskets  upon  their  backs.  An  ancient  author  tells  us  how 
a  peasant,  accused  of  sorcery  because  of  the  abundant  crops 
that  he  obtained  from  his  land,  while  the  neighboring  tracts 
were  perfectly  barren,  was  called  to  appear  before  the  Roman 
magistrate,  and  there,  showing  his  two  arms  as  the  only  de- 
fence he  had  to  offer,  exclaimed,  "These  are  my  sole  magic." 
Landed  property,  to  defend  itself  against  the  attacks  now 
made  upon  it,  need  only  give  the  same  proud  answer. 

And  even  if  the  land  were  not  a  direct  product  of  labor, 
it  is  (says  the  optimistic  school)  at  least  the  product  of 
capital.  The  value  of  land  and  its  growing  surplus  value 
are  sufficiently  explained  by  the  improvements  made  in  the 
land  and  the  expenditure  incurred  by  its  owners.  It  is  even 
said  that  if  we  kept  account  of  all  the  expenditure  incurred 
by  the  successive  owners  of  the  land,  we  should  reach  the 
conclusion  that  no  land  is  now  worth  what  it  has  cost.1 

Despite  the  element  of  truth  which  this  argument  con- 
tains, it  does  not  seem  to  us  conclusive.  No  doubt  man 
and  land  have  ever  been  bound  together  by  the  tie  of  daily 
labor,  often  labor  of  the  severest  kind.  The  biblical  prophecy, 
"  In  the  sweat  of  thy  face  shalt  thou  eat  bread,"  applied  to 
agricultural  labor ;  indeed,  the  word  labor  itself  originally  re- 
ferred to  tilling  the  soil,  and  the  modern  French  "  labourer  " 
has  the  same  meaning.  But  although  land  is  the  instrument 
of  labor,  it  is  not  the  product  of  labor.  It  existed  before  any 
human  labor.2  There  can  be  no  doubt  that  man,  by  labor 

1  The  historian  Michelet  declared  that  "  man  has  the  best  of  claims  to  the 
land, — that  of  having  made  it."     The  physiocrats  also  based  the  right  of 
property  on  the  expenditures  made  to  create  the  farm,  and  called  them 
"  advances  on  the  land." 

2  The  school  of  Bastiat,  in  order  to  prove  that  the  value  of  land  is  due 
solely  to  labor,  emphasizes  the  fact  that  where  land  is  uncultivated,  as  in 


596  PRINCIPLES   OF   POLITICAL   ECONOMY 

and  expenditure,  improves  and  modifies  this  marvellous  in- 
strument of  production  which  nature  has  provided.  In 
other  words,  he  adapts  it  better  to  his  purposes ;  and  in  this 
case  he  evidently  confers  upon  it  additional  utility  and  in- 
creased value.  We  must,  moreover,  recognize  that  with 
every  advance  in  the  methods  of  agriculture,  the  land  tends 
to  become  more  and  more  a  product  of  labor.  For  example, 
in  many  European  countries  vegetable  gardening  is  carried 
on  in  large  marshy  tracts,  covered  with  artificial  substances 
that  are  prepared  entirely  by  the  gardener ;  the  value  of 
such  tracts  is  manifestly  due  largely  to  labor.  But  it  is 
always  possible,  theoretically  if  not  practically,  to  discover 
the  value  of  the  original  soil  itself  under  the  successive 
additions  of  capital  and  labor. 

This  original  value  is  most  easily  perceptible  in  the  forest 
that  has  not  yet  been  cleared,  and  the  prairie  that  is  still 
uncultivated,  but  that  may  be  sold  or  rented  at  a  high  price. 
It  is  plainly  visible  in  the  tracts  of  sandy  shore  in  the 
French  departments  of  Gard  and  Herault  which  have  never 

certain  parts  of  America,  it  possesses  no  value.  This  fact  is  true  enough, 
but  the  argument  based  on  it  does  not  prove  anything.  Land  situated  on 
the  banks  of  the  Amazon  is  valueless,  not  because  it  is  uncultivated,  but 
simply  because  it  is  situated  in  a  wild  and  uninhabited  section  where  there 
are  no  men  to  utilize  things,  and  where  the  very  idea  of  wealth  cannot 
arise. 

It  is  obvious  that  no  land  had  any  value  before  the  first  human  being 
appeared  upon  its  surface,  and  that  it  will  cease  to  possess  any  value  when 
the  human  race  has  disappeared.  (See  pages  46  ff.)  But  the  virginity  of 
the  land  proves  nothing  in  this  respect.  If  we  were  able,  by  some  magic 
process,  to  transport  these  wild  Brazilian  tracts  to  the  shores  of  the  Hudson 
or  the  Delaware  just  as  they  are,  they  would  be  worth  as  much  as  the  oldest 
farms  in  New  York  or  Pennsylvania,  although  the  latter  have  been  worked 
and  tilled  and  cared  for  by  the  labor  of  many  generations.  Lest  the  above 
supposition  be  found  too  fantastic,  let  us  suppose  a  farm  anywhere  in  the 
country  to  be  surrounded  by  a  wall  and  entirely  abandoned  for  a  hundred 
years,  until  every  trace  of  human  labor  upon  it  had  entirely  disappeared. 
Would  any  one  dare  say  that  in  this  condition  the  land  would  lose  all  its 
value,  and  that  no  tenant  or  purchaser  could  be  found  for  it?  It  is  extremely 
likely,  on  the  contrary,  that  even  though  it  were  left  in  this  state  it  would 
be  worth  much  more  in  a  hundred  years  than  now. 


LAND    AND    LABOR  597 

been  tilled  by  man,  but  which  nevertheless  made  the 
fortunes  of  their  lucky  possessors  when  it  was  accident- 
ally discovered  that  grape-vines  planted  there  are  not  subject 
to  the  phylloxera.  It  is  equally  plain  in  the  case  of  building 
lots  in  large  cities,  —  lots  over  which  no  plough  has  ever 
passed,  yet  which  have  a  much  higher  value  than  the  most 
carefully  cultivated  farm. 

Even  in  the  case  of  cultivated  land,  the  natural  value  of 
the  soil  is  evidenced  by  the  unequal  fertility  of  different 
farms.  How  often  it  happens  that  although  two  plots  of 
land  have  been  subject  to  equal  labor  and  expenditure,  one 
may  yield  large  returns  every  year,  while  the  other  scarcely 
yields  enough  to  cover  expenses. 

The  argument  that  no  land  is  worth  what  it  has  cost  is 
mathematically  false,  as  we  shall  explain  presently.  This 
argument,  moreover,  does  not  apply  to  land  for  building  pur- 
poses, because  this  land  is  always  uncultivated. 

It  is  certain  that  if  we  add  the  value  of  all  the  labor  and 
capital  expended  on  a  given  piece  of  ground  in  one  of  our 
Eastern  states,  beginning  with  the  colonial  settler  who  first 
cleared  it,  we  shall  get  a  total  far  in  excess  of  the  present 
value  of  the  land.  But  for  our  calculation  to  be  complete 
and  correct,  it  would  be  necessary  also  to  add  all  the  receipts 
from  the  land,  beginning  with  the  same  date.  If  we  do 
this,  there  is  no  doubt  that  the  balance  of  such  corrected 
and  completed  accounts  will  show  that  the  land  has  yielded 
a  constantly  increasing  revenue. 

If,  then,  private  property  in  land  seems  so  hard  to  defend 
from  the  standpoint  of  abstract  justice,  why  has  it  existed 
since  time  immemorial,  and  why  has  it  been  maintained  by 
the  laws  of  almost  all  civilized  peoples  ?  Simply  because  it 
is  based  upon  public  utility,  —  which,  indeed,  is  a  sufficiently 
firm  basis.1  Its  origin  is  due  to  historical  forces  which  we 

1  The  important  distinction  between  landed  property  and  other  kinds  of 
property  is  clearly  indicated  by  the  Servian  Code  of  Laws  in  the  following 
clauses :  — 


598  PRINCIPLES    OF    POLITICAL   ECONOMY 

shall  discuss  in  the  following  section.  These  forces  gradu- 
ally did  away  with  primitive  communism,  and  ultimately 
brought  land  under  the  scope  of  free  and  individual  property, 
thus  making  it  more  nearly  like  property  in  movable  com- 
modities. They  gave  rise,  with  the  progress  of  agriculture 
and  the  development  of  civilization,  to  the  gradual  trans- 
formation of  property  and  land.  These  forces  were  as 
follows :  — 

(1)  The   growth   of   population   compelled   mankind   to 
practise  more  "  intensive  "  farming,  in  order  to  produce  an 
increasing  food-supply. 

(2)  To  stimulate   labor   it   was  considered  necessary  to 
give  the  cultivator  not  only  a  right  to  the  products  of  the 
land,  but  also  to  the  land  itself  as  the  instrument  of  his 
labor.     This  right  was  at  first  temporary ;  but  the  period  of 
its  duration  was  made  longer  and  longer,  as  the  progress  of 
agriculture  required  labors  of  longer  duration.     Finally,  the 
right  of  property  in  land  was  made  perpetual.1 

Have  these  considerations,  which  originally  gave  rise  to 
private  property  in  land,  now  lost  their  validity  as  a  means 

"The  right  of  property  in  products  and  movable  objects  acquired  by 
human  exertion  is  based  on  the  laws  of  nature." 

"  The  right  of  property  in  immovable  objects  and  in  the  soil,  whether  culti- 
vated or  uncultivated,  is  confirmed  by  the  constitution  of  the  country  and 
due  to  civil  laws." 

But  some  economists  are  unwilling  to  admit  any  distinction  between  what 
is  absolutely  just  and  what  is  socially  desirable  and  convenient.  Hence  some 
of  them  continue  trying  to  justify  private  property  in  land  by  basing  it  on 
labor,  while  others  (such  as  Mr.  L6on  Walras)  give  up  all  attempt  to  defend 
it,  and  advocate  the  transformation  of  the  individual  ownership  of  land  into 
social  property.  (See  the  section  on  the  Nationalization  of  Land.) 

1  The  right  to  the  fruits  of  the  earth  carries  with  it  a  right  to  the  earth  it- 
self, at  least  for  a  certain  period.  The  man  who  has  sown  the  seed  must  be 
given  time  to  reap  the  harvest.  The  planter  of  vines  must  wait  six  or  seven 
years  for  his  first  vintage ;  half  a  century  must  elapse  before  the  acorn 
becomes  a  full-grown  oak.  Moreover,  even  annual  crops,  if  the  methods  of 
farming  are  at  all  advanced,  require  certain  labors  (such  as  manuring, 
improvements  of  the  soil,  drainage,  and  irrigation),  which  will  not  pay  for 
themselves  in  less  than  ten,  twenty,  or  even  fifty  years.  The  man  who  has 


PRIVATE  PROPERTY  IN  LAND  599 

of  defence  against  the  attacks  of  its  adversaries  ?     We  think 
not. 

With  a  more  or  less  rapid  but  nevertheless  constant  in- 
crease of  population,  it  is  always  important  to  choose  that 
method  of  cultivating  the  soil  and  that  system  of  ownership 

carried  on  these  labors  must  be  given  a  chance  to  recoup  himself  ;  otherwise 
he  would  never  have  undertaken  them. 

Yet  if  property  in  land  be  based  only  on  reasons  of  social  utility,  the  pres- 
ent system  has  overshot  the  mark  in  two  respects  :  — 

(1)  It  would  have  been  sufficient  to  confine  the  right  of  property  to  the 
land  to  which  labor  has  really  been  applied.    This  principle,  curiously  enough, 
underlies  the  laws  of  the  Mohammedans  regarding  property  in  land,  which 
are  more  in  conformity  with  the  principles  of  economics  than  ours.     The 
Mohammedan  law  confines  private  property  to  such  land  as  has  been  made 
the  object  of   actual  labor,  —  land  that  has  been  irrigated,  or  drained,  or 
built  upon,  or  planted  upon,  or  tilled,  or  cleared,  or  levelled.      This  land 
is  designated  as  living  land,  in   contradistinction  to  uncultivated  or  dead 
land,  which  remains  collective  property.      "  When  a  man  has  put  life  into 
dead  land,"  says  the  prophet,  "  it  shall  belong  to  him,  and  he  shall  have  an 
exclusive  right  to  it."     The  application  of  this  principle  accounts  for  the  fact 
that  collective  property  in  Algeria  and  Java,  for  example,  still  occupies  an 
important  place. 

Two-fifths  of  the  area  of  France  (54,000,000  acres)  is  in  a  "  state  of  nature," 
but  less  than  one-third  of  this  land  (15,000,000  acres)  still  belongs  to  the  nation 
or  the  communes.  All  the  rest  has  been  brought  under  private  property,  on 
the  basis  of  no  other  title  than  occupation. 

(2)  We  may  well  ask  if  it  was  really  necessary  to  make  the  right  of  private 
property  perpetual  ?    This  characteristic  far  surpasses  the  exigencies  of  cul- 
tivation.    Man,  whose  lifetime  is  but  a  brief  span,  does  not  require  all  eternity 
for  the  accomplishment  of  even  the  greatest  enterprises.     The  franchises  of 
railroad  and  canal  companies  are  granted  only  for  terms  of  ninety-nine  years, 
as  a  rule.     In  England,  moreover,  the  laws  are  such  that  the  possession  of 
most  of  the  land  and  buildings  is  limited  to  a  period  of  ninety-nine  years. 

Rigorous  logic,  however,  would  appear  to  justify  the  conclusion  that  the 
right  of  property  should  last  as  long  as  the  object  to  which  it  applies.  And 
the  object  in  question  is  perpetual.  The  earth,  in  fact,  is  the  only  wealth 
which  possesses  this  quality.  Time,  the  destroyer  of  all  things, — tempus 
edax  rerum,  —  has  no  effect  on  the  land  except  to  give  it  a  new  youth  with 
each  returning  spring.  This  argument,  however,  is  a  specious  one.  What 
lasts  forever  is  the  productive  power  of  natural  forces,  not  the  transforma- 
tions effected  by  labor,  even  though  they  be  incorporated  with  the  soil.  In 
other  words,  that  which  gives  most  value  to  the  land,  — labor,  advantageous 
location,  etc. ,  —  does  not  constitute  an  everlasting  part  of  it. 


600  PRINCIPLES   OF   POLITICAL  ECONOMY 

which,  for  a  given  area,  will  provide  food  for  the  largest 
possible  number  of  persons.1  We  believe  that  in  strict 
justice  society  as  a  whole  should  own  all  the  land.  But 
society  cannot  better  promote  the  interests  of  all  than  by 
delegating  this  right  to  those  who  can  make  the  best  use  of 
the  land.2  Thus  far,  individual  owners  have  succeeded  in 
doing  this,  and,  until  proof  to  the  contrary  is  forthcoming, 
we  are  justified  in  thinking  that  they  are  the  persons  to 
whom  this  social  function  may  most  safely  be  intrusted.3 


IV.  The  Evolution  of  Property  in  Land 

Not  only  is  private  property  in  land  sanctioned  by  all 
modern  systems  of  legislation,  but  it  is  regarded  as 
the  very  type  of  private  property.  When  we  speak  of  a 
man's  property,  without  using  any  qualifying  term,  we 
are  generally  understood  to  mean  landed  property  or  real 
estate. 

Yet  we  may  regard  it  as  certain,  in  spite  of  numerous  con- 
troversies which  have  recently  been  waged  on  this  subject, 
that  property  in  land  is  an  institution  of  relatively  recent 

1  In  Canada  it  has  been  observed  that  the  indigenous  races  which  live  by 
hunting  require  the  enormous  area  of  fifteen  square  miles  per  person  in  order 
to  obtain  sufficient  food.     Below  this  limit,  famine  decreases  their  numbers. 
But  the  system  of  agriculture  practised  in  Western  Europe  enables  the  same 
area  to  support  more  than  four  thousand  persons. 

2  After  having  wavered  somewhat,  this  is  the  conclusion  which  Herbert 
Spencer  reached  in  his  book  on  Justice.     "  While  I  adhere  to  the  inference 
originally  drawn,  that  the  aggregate  of  men  forming  the  community  are  the 
supreme  owners  of  the  land  —  an  inference  harmonizing  with  legal  doctrine 
and  daily  acted  upon  in  legislation  —  a  fuller  consideration  of  the  matter  has 
led  me  to  the  conclusion  that  individual  ownership,  subject  to  state-suzer- 
ainty should  be  maintained." 

3  Collectivists  assure  us  that  the  collective  cultivation  of  the  soil  would 
produce  far  better  results  than  those  obtained  by  individual  ownership,  be- 
cause it  alone  would  permit  the  employment  of  large-scale  methods  of  produc- 
tion and  procure  the  advantages  that  ensue  therefrom.     In  this  connection, 
the  reader  should  refer  to  what  has  been  said  of  large-scale  and  small-scale 
agriculture  on  page  170. 


THE   EVOLUTION    OF   LANDED   PROPERTY  601 

date,  and  that  its  establishment  was  even  a  matter  of  great 
difficulty.1 

We  may  distinguish,  in  the  evolution  of  landed  property, 
six  successive  stages  which  we  shall  describe  briefly.2 

(1)  It  is  obvious  that  landed  property  cannot  arise  among 
peoples  that  live  by  hunting,  or  among  pastoral  races  lead- 
ing a  nomadic  life.     It  can  arise  only  with  the  beginnings  of 
agriculture.      And  even  in  the  early  phases  of  agricultural 
life,  landed  property  is  not  yet  instituted.     This  is  due  to 
two  circumstances.     First,  because  the  land  is  superabundant 
and  no  one  feels  the  need  of  marking  off  his  share.     Secondly, 
because  agricultural  methods  are  still  in  a  primitive  state; 
the  farmer  leaves  one  field  as  soon  as  it  is  exhausted,  and 
takes   another.      The  land  is  cultivated  in  common,  or  at 
least  without  any  effort  to  attribute  separate,  well-defined 
parts  of  it  to  particular  individuals.      It  belongs  to  society 
as  a  whole,  or  rather  to  the  tribe.     Only  the  product  of  the 
soil  belongs  to  the  man  or  family  cultivating  it.3 

(2)  Gradually  the    population  becomes   more  sedentary 

1  The  establishment  of  absolute  private  property  in  land  is  perhaps  the 
most  characteristic  feature  of  Roman  law  ;  and  yet,  even  in  the  early  history 
of  Rome,  it  seems  beyond  question  that  individual  property  applied  only  to 
the  home  and  to  a  narrowly  limited  area  surrounding  it. 

Among  the  authors  who  consider  that  property  was  collective  at  the 
beginning,  we  may  refer  to :  De  Laveleye,  "Primitive  Property  "  ;  Sir  Henry 
Maine,  "Ancient  Law";  Paul  Lafargue,  "The  Evolution  of  Property." 
The  opposite  position  is  upheld  by  Fustel  de  Coulanges,  "  Origin  of  Property 
in  Land"  ;  Guiraud,  "  La  proprie"t£  fonciere  en  Grece." 

2  The  order  here  given  is  logical  rather  than  chronological.     We  must  not 
be  understood  to  mean  that  in  all  countries  property  has  gone  through  each 
of  these  stages  in  precisely  the  order  given.    The  dominium  ex  jure  quiritium, 
for  instance,  —  a  form  of  free  and  absolute  property,  —  preceded  feudal  prop- 
erty in  point  of  time,  although  logically  it  was  a  superior  form. 

3  Arvaper  annos  mutant  (they  change  their  land  annually)  is  a  famous 
phrase  used  by  Tacitus  in  speaking  of  the  old  Germans.    The  meaning  of 
this  phrase  has  recently  been  contested,  and  a  new  and  somewhat  paradoxical 
translation  proposed,  viz.   "They  change  their  rotation  of  crops  yearly." 
The  system  of  tribal  ownership  of  land  is  still  found  in  several  countries,  e.g. 
the  arch  of  the  indigenous  tribes  of  Algeria. 


602  PRINCIPLES   OF   POLITICAL   ECONOMY 

and  more  closely  attached  to  the  land.  It  also  becomes  denser, 
and  is  forced  to  adopt  more  productive  methods  of  agricul- 
ture. Thus  the  first  stage  is  succeeded  by  a  second,  viz. 
that  of  temporary  possession  together  with  periodical  divi- 
sions. Though  the  land  is  still  regarded  as  belonging  to 
society,  it  is  divided  equally  among  all  the  heads  of  families. 
This  division,  moreover,  is  temporary,  not  permanent.  First 
of  all,  it  is  only  for  a  period  of  one  year,  this  space  of  time 
being  sufficient  for  the  ordinary  cycle  of  agricultural  opera- 
tions. Then,  as  methods  of  husbandry  improve  and  culti- 
vators require  a  longer  time  for  the  accomplishment  and 
fruition  of  their  labors,  the  partition  of  the  land  is  gradually 
allowed  to  last  for  much  longer  periods.  This  system  of  a 
periodical  division  of  the  land  still  exists  in  Russia,  and 
is  known  as  the  mir ;  it  is  even  found  in  several  Swiss  can- 
tons under  the  name  of  allmend.  The  community  as  a 
whole  (i.e.  the  population  of  each  village),  owns  the  land 
and  distributes  it  among  its  members  by  a  periodical  division, 
the  frequency  of  which  varies  from  one  commune  to  another.1 
(3)  There  comes  a  time  when  these  periodical  divisions 
fall  into  disuse.  Skilful  farmers  who  have  improved  the 
land  do  not  willingly  submit  to  an  arrangement  which  at 
certain  intervals  deprives  them,  to  the  profit  of  the  community, 
of  the  increase  of  value  due  to  their  labor.  Thus  arises 

1  The  territory  of  the  commune  is  divided  into  three  classes.  The  first 
includes  the  land  upon  which  buildings  have  been  erected,  together  with  the 
gardens  around  them.  This  property  is  hereditary  ;  it  may  be  sold,  and  is 
not  subject  to  division.  The  second  includes  the  arable  land,  which  is  divided 
at  certain  intervals  into  portions  as  equal  as  possible,  according  to  the  num- 
ber of  inhabitants.  The  third  consists  of  meadow-land  and  forests,  and 
generally  remains  undivided  both  with  regard  to  use  and  to  ownership.  The 
mir,  an  assembly  consisting  of  the  heads  of  the  families,  has  sovereign  power 
in  the  distribution  of  shares  and  the  system  of  cultivation.  (For  further 
details  consult  Kovalewsky,  "  Le  Regime  Economique  de  la  Russie.)  It  is  a 
matter  of  controversy  among  Russian  economists  whether  this  institution  is 
only  a  survival,  bound  soon  to  disappear  (as  it  has  already  disappeared  in 
the  rest  of  Europe),  or,  on  the  contrary,  the  precursor  of  a  future  form  of 
property. 


THE    CONQUEST    OF    LAND  603 

the  institution  of  family  proprietorship,  each  family  hence- 
forward being  regarded  as  the  permanent  owner  of  its  share 
of  land.  Yet  this  is  not  individual  property,  for  the  right 
of  disposal  does  not  exist.  The  head  of  the  family  can  neither 
sell  the  land,  nor  give  it  away,  nor  bequeath  it  after  his 
death ;  for  it  is  regarded  as  a  collective  patrimony  and  not 
as  individual  property.  This  system  can  now  be  studied  in 
the  family  communities  of  Eastern  Europe,  especially  the 
Zadrugas  of  Bulgaria  and  Croatia,  which  consist  of  between 
fifty  and  sixty  persons ;  they  are  now  rapidly  disappearing 
because  of  the  spirit  of  independence  manifested  by  the 
younger  members  of  the  family. 

(4)  The  evolution  of  landed  property  passes  also  through 
a  stage  which,  though  accidental,  has  never  been  wanting  in 
the  history  of  human  societies.  I  refer  to  conquest.  There 
is  probably  not  a  single  territory  anywhere  on  the  surface  of 
the  earth  that  has  not  been  taken  by  force  at  some  time  or 
other  from  the  people  that  occupied  it,  and  been  appropria- 
ted by  the  conquering  race.1  The  victors,  however,  in  virtue 
of  their  position  as  conquerors  and  masters  did  not  care  to 
cultivate  the  land,  but  merely  assumed  the  legal  ownership 
and  "  oveiiordship,"  leaving  the  subjected  people  practically 
in  possession  of  the  soil.  Land  tenure  was  more  or  less  akin 
to  actual  ownership,  but  always  limited  by  the  terms  of  an 
agreement  between  lord  and  vassal ;  "  obligations  "  were  im- 
posed upon  the  latter ;  dues  and  services  were  exacted  from 
him  by  the  lord ;  and  he  could  not  alienate  the  land  or 
leave  it  without  the  lord's  permission.2  For  several  centuries 

1  As  a  proof  of  the  influence  which  conquest  has  had  upon  the  evolution  of 
landed  property,  Herbert  Spencer  makes  the  interesting  observation  that  the 
regions  in  which  the  old  forms  of  collective  property  have  been  best  preserved 
are  precisely  those  poor  and  mountainous  localities  whose  situation  has  ena- 
bled them  to  escape  conquest. 

2  Accounts  of  the  system  of  land-holding  under  feudalism,  the  very  basis 
of  which  was  a  peculiar  system  of  land-tenure,  may  be  found  in  the  following 
publications:   A.  R.  Wallace,  "Land  Nationalization1';  S.  W.  Thackeray, 
"The  Land  and  the  Community  "  ;  the  article  on  "Land"  in  Bliss'  Ency- 


604  PRINCIPLES   OF   POLITICAL    ECONOMY 

this  system,  known  as  feudalism,  was  the  foundation  of  the 
social  and  political  constitution  of  Europe.  There  are  still 
traces  of  it  in  many  countries.  Especially  in  England,  almost 
all  landed  property  is  still,  in  the  eyes  of  the  law,  held  by 
a  limited  tenure,  and  is  hedged  about  by  a  multitude  of  re- 
strictions very  difficult  to  remove.1 

(5)  The  growth  of  individualism  and  of  equality  before 
the  law,  together  with  the  abolition  of  the  feudal  system, 
particularly  in  those  countries  which  felt  the  influence  of  the 
French  Revolution  of  1789,  led  to  a  fifth  stage  which  marks 
our  own  epoch.  This  is  characterized  by  the  final  establish- 
ment of  free  property  in  land,  with  all  its  attributes.  Never- 
theless, property  in  land  is  not  entirely  on  the  same  footing 
as  personal  or  movable  property.  There  are  numerous  points 
of  difference,  familiar  to  lawyers  ;  but  the  essential  difference 
consists  of  additional  difficulties  connected  with  the  trans- 
fer of  property  in  land,  or  so-called  realty? 

clopedia  of  Social  Reform;  Cunningham,  ««  Growth  of  English  Industry  and 
Commerce,"  Vol.  I;  Emerton,  "Medieval  Europe." 

1  "Thus  was  established,  in  our  English  law,  the  cardinal  maxim  with  re- 
gard to  the  possession  of  lands,  viz.,  that  the  king  is  the  sole  master  and  the 
original  owner  of  all  the  land  in  the  kingdom."     (Consult  Blackstone's 
' '  Commentaries. ' ' ) 

2  By  the  English  statute  of  frauds,  reenacted  by  the  great  majority  of  our 
state  legislatures,  a  conveyance  of  an  estate  or  interest  in  land  (except  leases 
for  three  years  or  less)  is  required  to  be  in  writing  and  signed  by  the  party 
undertaking  the  same.    As  a  general  rule  this  conveyance  must  also  be  ' '  under 
seal,"  although  such  seal  in  some  of  our  states  may  be  a  mere  flourish  of  the 
pen. 

Again,  a  wife  must  join  with  her  husband  in  signing  or  acknowledging  a 
deed  or  mortgage  of  land,  in  order  that  the  title  may  be  perfect. 

Other  instances  of  the  formalities  and  difficulties  trammelling  the  transfer 
of  land  in  this  country  are  these  :  — 

As  soon  as  the  grantee  of  real  estate  obtains  a  deed  or  mortgage  of  it,  he 
must  have  it  recorded  by  a  public  official, — generally  the  county  clerk  or 
register  of  deeds.  In  order  to  entitle  it  to  record,  the  conveyance  must  be 
acknowledged  by  the  grantor  before  a  proper  officer,  —  a  notary  public,  a 
commissioner  of  deeds,  or  the  like.  Upon  the  sale  of  real  estate  it  is  custom- 
ary for  the  vendor  to  furnish  an  "  abstract  of  title  "  or  "  search,"  showing  the 
true  condition  of  the  title. 


TRANSFERABILITY    OF    LAND  605 

(6)  But  one  more  step  must  be  taken  in  order  that  landed 
property  shall  be  precisely  like  personal  property.  This  step 
consists  in  making  property  in  land  perfectly  mobile  or  trans- 
ferable, i.e.  making  it  possible  for  any  person  not  only  to 
call  the  land  his  own,  but  to  dispose  of  it  as  simply  and  as 
easily  as  of  any  other  object  of  value.  This  final  step  has 
been  accomplished  in  a  new  country,  Australia,  by  the  cele- 
brated Torrens  system,1  which  enables  the  owner  of  real 
estate  to  put  his  land,  so  to  speak,  into  his  pocket-book  in 
the  form  of  a  piece  of  paper,  and  to  transfer  it  to  some 
one  else  as  easily  as  if  it  were  a  bank  note,  or  at  least 
a  bill  of  exchange.  Efforts  have  recently  been  made  to 
introduce  this  system  in  the  old  countries  of  Europe,  and 
it  is  probable  that  the  logic  of  facts  and  the  natural  laws 
of  social  evolution  outlined  above  will  lead  to  its  ultimate 
acceptance  everywhere. 

The  inference  that  may  be  drawn  from  this  rapid  review 
is  that  property  in  land  has  gradually  and  steadily  departed 
from  its  original  collective  form  and  become  increasingly  indi- 
vidualistic, thus  approaching  more  and  more  closely  the  state 
of  affairs  in  which  private  property  in  land  is  practically 

1  This  system,  named  after  the  man  who  caused  its  adoption  in  New 
South  Wales  about  fifty  years  ago,  consists  essentially  of  the  following 
features  :  — 

(1)  There  is  a  register  in  which  each  plot  of  ground  has  its  own  page,  giving 
a  plan  and  description  of  it  and  containing,  as  it  were,  a  history  of  the  land 
since  the  time  when  it  became  private  property. 

(2)  There  is  a  title-deed,  which  is  a  facsimile  sometimes  even  a  photo- 
graphic reproduction,  of  the  corresponding  leaf  in  the  register.    When  this 
has  been  handed  over  to  the  owner,  it  absolutely  represents  the  land  itself  and 
may  be  sold,  given  for  security,  etc. 

The  purpose  of  this  system,  as  Torrens  himself  declared,  is  to  rid  landed 
property  of  all  the  barriers  that  prevented  free  access  to  it,  "  like  the  port- 
cullis, drawbridge  and  moats  which  prevented  access  to  the  castles  of  our 
ancestors."  This  system,  adopted  in  turn  by  all  the  Australasian  colonies,  as 
well  as  in  some  other  English  colonies  and  in  Tunis,  is  under  consideration 
in  several  countries.  Several  legislative  attempts  have  been  made  to  introduce 
it  in  England.  It  was  adopted  in  Illinois  a  number  of  years  ago,  but  soon 
declared  unconstitutional  by  the  Supreme  Court  of  that  state. 


606 


PRINCIPLES   OF   POLITICAL  ECONOMY 


indistinguishable  from  private  property  in  personal  goods 
and  capital.1 

V.  The  Hire  of  Land 

In  the  United  States,  agriculture  has  been  carried  on 
chiefly  by  the  proprietors  themselves,  not  by  agricultural 
tenants.  There  are  millions  of  farms  just  large  enough  to 
employ  profitably  the  labor  of  the  proprietor  and  his  family.2 
The  good  effects  of  the  system  of  private  land  tenure  are 
most  conspicuously  seen,  when,  as  is  here  the  case,  the  owner 
and  the  occupier  of  the  land  are  one  and  the  same  person. 
"  Under  these  conditions,  land  ownership  serves  at  once  as  a 
motive  to  zeal  in  labor  and  to  liberality  in  investment. 
When  one  man  owns  the  land  and  another  occupies  it,  the 
right  of  the  owner  to  the  benefit  of  all  improvements  not 

1  This  tendency  furnishes  presumptive  evidence  against  a  future  collec- 
tivistic  organization  of  society.     Yet  it  is  not  conclusive  evidence,  for  we 
have  already  pointed  out  several  cases  of  regressive  evolution. 

2  The  following  census  statistics  show  the  character  of  our  agricultural 
tenures. 


YEAR 

CULTIVATED  BY  OWNER 

RENTED  FOR  MONET 

EENTED  FOR  SHARES 

Total 

Per  cent 

Total 

Per  cent 

Total 

Per  cent 

1900 
1890 
1880 

3,712,408 
3,269,728 
2,984,306 

64.7 
71.6 
74.5 

751,665 
454,659 
322,357 

13.1 
10.0 
8.0 

1,273,299 
840,254 
702,244 

22.2 
18.4 
17.5 

The  figures  for  1880  and  1890  do  not  include  farms  with  an  area  of  less 
than  3  acres  which  reported  the  sale  of  less  than  $500  worth  of  products  in 
the  census  year.  On  the  other  hand,  many  farms  were  counted  twice  in 
those  years  whenever  they  were  tilled  in  part  by  the  owner,  and  rented  in  part. 

Although  the  relative  number  of  farms  cultivated  by  owners  has  decreased 
since  1880,  the  census  authorities  call  attention  to  the  fact  that  the  farms 
operated  by  owners  have  increased  faster  since  1850  than  the  agricultural 
population.  Such  an  increase  can  only  be  possible  providing  the  increase  in 
the  number  of  tenants  has  been  by  the  elevation  of  former  wage  employees  to 
the  position  of  farm  tenants.  (See  Twelfth  Census,  Vol.  V,  pages  xliii  and 
Ixxvii.) 


THE   KENT   CONTRACT  607 

infrequently  acts  as  a  discouragement  to  the  occupier  and 
prevents  him  from  laboring  with  the  zeal  or  the  skill  which 
he  would  otherwise  use."1 

In  England,  the  land  is  usually  owned  by  some  rich  man 
who  possesses  large  estates,  but  does  not  care  to  engage  in 
the  active  business  of  farming.  The  farmer  hires  the  land 
and  its  improvements  from  the  proprietor,  and  stocks  it  with 
cattle,  carts,  improved  implements  of  all  kinds,  and  then 
employs  day-laborers  to  do  the  manual  work,  laboring  him- 
self in  superintendence,  in  keeping  accounts,  buying  and 
selling,  etc.  The  laborer,  generally  speaking,  is  nothing  but 
a  laborer,  and  the  tenant-farmer  is  his  employer.  2 

Rent,  by  which  we  now  mean  the  income  which  the  pro- 
prietor of  a  farm  receives  for  letting  it  to  an  entrepre- 
neur, closely  resembles  the  income  from  labor  (called 
wages),  and  the  income  from  capital  (called  interest).  Like 
wages  and  interest,  rent  is  agreed  upon  by  contract  in  ad- 
vance of  the  business  enterprise  in  which  land,  labor,  or 
capital  are  to  be  engaged ;  in  consideration  of  a  regular 
money  annuity,3  the  landlord  abandons  all  claim  to  the  prod- 
ucts of  the  farm.  But  although  there  is  a  close  legal 
resemblance,  there  is  in  reality  a  great  difference.  For  in 
the  contract  between  the  laborer  and  the  entrepreneur  or  em- 

1  Hadley,  "  Economics,"  page  130.   When  the  farms  cultivated  by  owners 
are  very  small,  the  methods  of  farming  are  likely  to  be  primitive,  capital  is 
likely  to  be  insufficient,  and  a  few  bad  seasons  may  lead  to  distress  and  ruin. 
The   disadvantages  under  which  so-called  peasant  proprietors  suffer  are 
briefly  indicated  in  Jevons,  "  Primer  of  Political  Economy,"  page  89. 

2  Jevons,  "  Primer  of  Political  Economy." 

3  It  must  be  noted,   however,  that  just  as  the  wage  system  has  been 
amended  by  what  is  known  as  profit-sharing,  and  the  payment  of  interest 
transformed  into  the  payment  of  dividends,  so  also  the  system  of  tenantry 
or  leasing  land  to  others  is  sometimes  supplanted  by  the  metayer  system, 
which  plays  an  important  part  in  France,  Italy,  and  several  other  countries. 
This  system,  whereby  the  cultivator  gives  a  share  of  the  product  to  the  pro- 
prietor, who  generally  furnishes  the  stock  and  improvements,  also  prevails  to 
a  large  extent  in  the  south  of  the  United  States.      (See  the  statistics  regard- 
ing share  tenantry  on  page  606,  note  2.) 


608  PRINCIPLES   OF   POLITICAL   ECONOMY 

ployer,  the  latter  occupies  the  predominant  situation,  whereas 
in  the  contract  between  the  landowner  and  the  entrepreneur 
known  as  the  tenant,  the  former  undoubtedly  has  the  advan- 
tage. History  furnishes  few  instances  of  employers  exploited 
by  their  laborers ;  but  it  offers  innumerable  examples  of 
tenants  robbed  by  their  landlords.  While  legislative  bodies 
sometimes  feel  called  upon,  on  the  one  hand,  to  establish 
a  minimum  rate  of  wages  (as  in  Belgium),  they  are  also 
obliged,  on  the  other  hand,  to  fix  a  maximum  rental  (as  in 
Ireland) . 

We  have  already  said  that  the  price  actually  paid  for  the 
use  of  a  farm  does  not  necessarily  coincide  with  economic 
rent,  which  is  distinct  and  separate  from  wages  and  in- 
terest, and  due  solely  to  forces  that  are  independent  of  the 
landlord's  conduct.  The  price  paid  for  the  hire  of  a  farm 
(for  which  the  French  vocabulary  has  a  distinct  term, 
fermage),  is  usually  greater  than  the  land-rent.  There 
are  usually  buildings,  roads,  fences,  drains,  and  other  im- 
provements, of  which  the  landlord  is  also  the  owner;  in 
respect  of  these,  he  is  a  capitalist,  and  the  return  he  receives 
is  interest.  Again,  the  pressure  of  necessity  may  oblige 
the  tenant  to  pay  the  landlord  not  only  the  surplus  that  is 
due  to  natural  and  social  forces,  but,  in  addition  to  this,  a 
part  of  the  reward  of  his  own  labor.  Yet  it  may  happen, 
contrariwise,  when  tenants  are  not  numerous  but  in  great 
demand,  that  the  price  for  hiring  farms  will  be  less  than  the 
land-rent ;  in  which  case  the  tenant  retains  for  himself  a 
part  of  the  proceeds  due  to  the  natural  advantages  of  the 
land. 

The  price  which  the  tenant  pays  for  the  use  of  a  farm  is 
governed  by  the  same  laws  as  the  rate  of  wages  or  of  interest, 
i.e.  by  the  laws  of  supply  and  demand.  In  new  countries, 
where  land  is  abundant,  and  where  everybody  can  find 
vacant  land  upon  which  to  settle  as  landlord,  tenants  usually 
will  not  consent  to  pay  more  for  hiring  a  farm  than  the 
interest  on  the  capital  that  has  been  put  into  it.  Wherever, 


THE   TENANT    SYSTEM  609 

on  the  other  hand,  the  population  is  very  dense,  the  land 
entirely  occupied,  and  the  wealth  of  the  nation  entirely  agri- 
cultural —  as  in  Algeria  or  Ireland  —  the  high  rent  may  leave 
the  tenant  barely  enough  to  support  life.1 

The  system  of  tenantry  and  the  income  due  to  it,  although 
sanctioned  by  venerable  custom,  must  be  regarded  as  incom- 
patible with  the  best  interests  of  society,  for  reasons  quite 

1  In  Algeria,  the  tenants  called  khammes  retain  only  one-fifth  of  the  harvest. 
It  is  well  known  that  in  Ireland  the  rent  of  farms  has  increased  to  such  an 
extent  that  part  of  the  population  has  died  of  hunger,  another  part  of  it 
has  been  obliged  to  emigrate,  while  those  who  remain  are  in  permanent 
insurrection.  Since  1881  a  series  of  land  laws  have  been  promulgated  for 
the  sole  purpose  of  introducing  more  humane  conditions  among  tenants. 
The  remarkable  law  of  1903,  which  will  probably  mark  an  epoch  in  the  his- 
tory of  the  country,  provides  that  the  British  government  shall  assist  Irish 
tenants  to  purchase  their  land  upon  equitable  terms. 

Where  the  system  of  tenantry  prevails,  as  in  England,  a  great  deal  de- 
pends, of  course,  on  the  nature  of  the  agreement  between  the  landowner 
and  the  farmer.  Many  English  landlords  refuse  to  let  their  land  for  long 
periods.  They  like  to  have  farmers  who  are  tenants  at  will,  and  can  be 
turned  off  their  farms  at  a  year's  notice,  and  deprived  of  the  value  of  all 
improvements  they  have  made,  if  they  offend  the  great  landowner.  Tenants 
at  will  have  no  inducement  to  improve  their  farms,  because  this  would  tempt 
the  landowner  to  turn  them  out  or  to  raise  the  rent.  "  There  are  two  modes 
of  remedying  the  unfortunate  state  of  land  tenure  in  this  country,"  says 
Professor  Jevons,  speaking  of  Great  Britain,  "namely,  (1)  By  a  system  of 
long  leases;  (2)  By  tenant  right." 

"A  lease  is  a  formal  agreement  to  let  land  or  houses  to  a  tenant  for  a 
certain  number  of  years,  at  a  fixed  rent  and  with  various  conditions  which 
are  carefully  stated  to  prevent  misunderstanding.  When  land  is  taken  by 
a  farmer  under  a  lease  for  thirty  years  or  more,  it  becomes  almost  like  his 
own  property,  because,  in  the  earlier  part  of  his  term,  he  can  make  great 
improvements,  and  yet  be  sure  of  getting  the  value  back  before  the  lease 
comes  to  an  end.  In  the  eastern  parts  of  England  and  Scotland,  where  the 
farms  are  largest  and  best  managed,  these  long  leases  are  the  usual  mode  of 
letting  land." 

"  Another  good  arrangement  is  tenant  right,  which  consists  in  giving  the 
tenant  a  right  to  claim  the  value  of  any  unexhausted  improvements  which  he 
may  have  made  in  his  farm,  if  he  be  turned  out  of  it." 

Modern  society  often  so  far  modifies  the  principle  of  private  property  in 
land  as  to  introduce  judicial  rents  instead  of  competitive  ones  ;  that  is  to  say, 
the  rent  is  determined  by  public  arbitration  between  landlord  and  tenant. 


610  PRINCIPLES    OF   POLITICAL   ECONOMY 

different  from  those  which  led  us  to  antagonize  the  wage 
system.  We  believe  that  tenancy  is  bound  to  make  way  for 
direct  cultivation  by  the  owners  themselves,  either  separately 
or,  better  still,  through  partnership  or  cooperation. 

Our  first  objection  to  the  tenant  system  is  that  it  under- 
mines private  property  in  land  by  destroying  the  validity 
of  the  principal  argument  in  favor  of  that  institution.  We 
have  pointed  out  that  private  property  in  land  does  not 
owe  its  existence  to  "natural"  or  "divine"  law,  but  simply 
to  the  recognition  that  it  is  the  most  productive  method 
of  cultivating  the  soil,  and  the  system  most  conform  to 
the  general  interest.  We  have  taken  it  for  granted  that 
no  one  can  make  better  use  of  the  land  than  the  owner  him- 
self. But  this  assumption  loses  all  sense  when  the  owner, 
by  leasing  his  land  to  a  tenant,  shifts  the  work  of  culti- 
vation upon  some  one  else  and  goes  off  to  a  large  city  or 
a  foreign  country  to  live  on  the  income  drawn  from  his 
estates. 

The  landlord  who,  instead  of  cultivating  the  soil,  uses  it 
simply  as  an  instrument  of  money-making  and  a  means  to 
live  in  idleness,  is  ill  suited  for  the  social  mission  assigned 
to  him.  It  is  difficult  to  conceive  that  the  land  has  been 
distributed  to  certain  men  simply  in  order  to  furnish  them 
with  an  income,  fruges  consumere  nati,  in  the  same  way  that 
kings  formerly  distributed  benefices  and  prebends  among 
their  favorites.  The  very  reasons  which  seemed  sufficient 
to  justify  the  right  of  property  in  land  militate  against  the 
system  of  tenantry. 

A  second  complaint  against  the  system  is  that  the  separa- 
tion of  the  roles  of  landowner  and  farmer,  which  results  from 
the  leasing  of  land,  is  disastrous  to  agriculture.  To  make 
the  best  and  fullest  use  of  the  land,  a  man  must  love  the 
soil  and  cling  to  it.  But  when  the  land  is  cultivated  by 
tenants,  this  love  of  the  soil  is  necessarily  weakened,  both  in 
the  landlord  and  the  tenant.  The  former  often  lives  far 
away  from  the  land  and  sometimes  knows  nothing  about  it ; 


THE  TENANT   SYSTEM  611 

the  latter  merely  hires  it  for  a  while  and  does  not  care  what 
ultimately  becomes  of  it.1 

The  arguments  presented  in  favor  of  the  tenant  system 
are  these :  — 

(1)  It  is  uncommon  to  find  a  landlord  —  unless  he  be 
an  absentee  —  who  has  absolutely  no  interest  in  the  land. 
The  system  of  tenantry,  moreover,  constitutes  a  division  of 
labor  in  perfect  harmony  with  a  satisfactory  organization  of 
production.     "  The  landlord,"  says  Professor  Leroy-Beau- 
lieu,  "stands  for  the  future  and  perpetual  interests  of  the 
farm,  whereas  the  tenant  considers  its  present  and  tempo- 
rary interests." 

But  even  supposing  that  the  landlord  always  understands 
his  part  perfectly,  it  is  possible  that  these  present  and  future 
interests  may  conflict  with  each  other ;  hence  it  would  be 
better  that  both  interests  be  in  care  of  the  same  person. 

(2)  To  forbid  leasing  land  to  tenants  would  compel  many 
owners  to  sell  their  estates,  and  would  thus  exclude  from 
land-holding  a  number  of  persons  whose  age,  sex,  or  profes- 
sion, or  whose  obligatory  absence  or  extensive  possessions 
make  it  impossible  for  them  to  cultivate  their  estates  them- 
selves. 

This  may  well  be  true;  but  this  result  constitutes  an 
advantage  rather  than  an  evil.  If  these  persons  cannot 

1  In  certain  parts  of  France,  whenever  people  remark  upon  the  inferiority 
of  crops  on  certain  farms,  it  is  not  uncommon  to  hear  the  reply,  "Oh,  one 
can't  expect  anything  better.  That  land  is  only  hired  land." 

The  metayer  system  is  not  open  to  the  objections  stated  above.  The 
customary  complaint  against  it  is  that  it  is  a  system  of  cultivation  suited 
only  for  barbarous,  comparatively  uncivilized  peoples,  and  compatible  solely 
with  poor  and  primitive  methods  of  farming.  But  this  depends  on  the 
method  of  agriculture  and  on  the  terms  of  the  contract,  which  are  very 
elastic.  In  Tuscany  the  metayer  system  has  been  found  perfectly  com- 
patible with  advanced  methods  of  cultivation.  It  possesses,  over  the  system 
of  tenantry,  the  following  two  advantages :  — 

(1)  It  prevents  the  landlord  from  losing  interest  in  the  cultivation. 

(2)  It  never  embarrasses  the  tenant  with  regard  to  paying  rent,  inasmuch 
as  he  pays  in  goods  out  of  each  harvest  —  when  there  is  one. 


612  PRINCIPLES   OF   POLITICAL   ECONOMY 

properly  perform  their  function  as  landowners,  let  them 
cease  to  be  landowners!  If  we  want  to  preserve  private 
property  in  land,  it  must  become  an  occupation,  a  profession, 
a  function,  and  all  economic  and  legal  means  must  be  em- 
ployed to  attain  a  social  condition  of  affairs  in  which  the 
function  of  landowner  shall  fall  only  to  the  lot  of  those 
persons  who  are  willing  and  competent  to  perform  it,  i.e.  to 
those  who  will  themselves  cultivate  the  land.1  A  function 
that  is  so  important  for  the  welfare  of  society  must  not  be 
"leased"  or  delegated. 

In  the  United  States  the  present  favorable  condition  of 
affairs  is  largely  due  to  the  fact  that  millions  of  settlers  have 
found  homes  on  land  obtained  from  the  government  by  gift 
or  at  prices  of  from  11.25  to  $2.50  per  acre.  Land  may  be 
secured  through  the  General  Land  Office,  either  by  direct 
purchase  or  under  the  homestead  laws.2  Hence,  the  public- 
land  states  of  the  Central  West,  built  up  by  settlers  upon 
land  purchased  or  granted  out  of  the  "  public  domain,"  are 
composed  for  the  most  part  of  a  large  number  of  proprietors, 
not  of  separate  classes  of  landlords  and  tenants.  Under  the 
homestead  law,  "any  citizen  of  the  United  States,  or  any 
person  who  has  declared  his  intention  of  becoming  such,  who 
is  the  head  of  a  family,  or  has  attained  his  majority,  or  has 

1  The  above  statement  must  not  be  interpreted  as  an  acceptance  of  the 
formula:  "The  land  should  belong  to  small  proprietors."     Small  farming 
with  scant  capital  is  as  undesirable  as  the  tenantry  system.     Small  proprietors 
are  usually  unprogressive.     It  is  not  necessary  that  the  land  be  held  only  by 
those  who  guide  the  plough  or  wield  the  hoe.     Large  landowners  frequently 
introduce  better  methods,   which  would  never  have   been  tried  by  small 
proprietors  unless  the  former  had  proved  them  to  be  successful. 

2  Before  1820,  the  minimum  price  of  land  was  $2  per  acre;    the  price 
was  then  reduced  to  $1.25.     Some  lands  may  still  be  purchased  at  that  rate, 
while  others  are  held  at  $2.50  per  acre.     The  public  domain  of  the  United 
States  open  to  settlement  comprised,  on  July  1,  1902,  over  five  hundred  mil- 
lion acres  (excluding  Alaska  and  our  new  insular  possessions).     These  lands 
are  partly  situated  in  the  Rocky  Mountain  and  Pacific  Coast  states  and  terri- 
tories ;  a  large  share  are  arid,  and  probably  can  never  be  brought  under 
cultivation. 


LAND    TENURE   IN   FRANCE  613 

served  in  the  army  or  navy  in  time  of  war,  and  is  not  already 
the  proprietor  of  more  than  160  acres  of  land  in  any  state 
or  territory,  is  entitled  to  enter  a  quarter  section  (160  acres), 
or  any  less  amount  of  unappropriated  public  land,  and  may 
acquire  title  thereto  by  establishing  and  maintaining  resi- 
dence thereon,  and  improving  and  cultivating  the  land  for 
a  period  of  five  years." 1 

In  France,  the  law  encourages  cultivation  by  the  owners 
themselves  and  facilitates  the  formation  of  small  landed 
estates.2  These  laws,  however,  have  injurious  effects  when 
they  increase  the  limitations  on  the  transfer  of  land  belong- 
ing to  minors,  to  married  women,  or  to  corporations.  For  in 
this  case  it  becomes  necessary  to  let  the  land  to  tenants,  inas- 
much as  the  land  is  forcibly  kept  in  the  hands  of  persons 
who  cannot  cultivate  it  themselves.  Thus,  under  the  pretext 
of  protecting  the  interests  of  certain  individuals,  the  welfare 
of  society  is  jeopardized. 

1  For  the  fiscal  year  ended  June  30,  1902,  the  homestead  entries  amounted 
to  14,033,246  acres.     The  sales  of  public  lands  for  the  same  period  amounted 
to  $5,880,088.65. 

The  extent  to  which  advantage  has  been  taken  of  our  land  laws  and  home- 
stead laws  by  the  people  of  the  country  accounts  in  no  small  measure  for  the 
facts  indicated  on  page  606,  note  2.  The  following  figures  from  the  census 
of  1900  are  also  interesting  in  this  connection  :  — 

Families  occupying  encumbered  farms  of  their  own  ....  1,094,573 
Families  occupying  unencumbered  "«**•*«  ....  2,422,678 

Total  families  occupying  their  own  farms 3,517,251 

Families  occupying  hired  farms 2,013,903 

Total  families  occupying  farms 5,531,154 

2  About  one-third  of  the  farms  of  France  —  36  per  cent  —  are  under  the 
regime  of  tenantry,  12  per  cent  under  the  metayer  system,  and  52  per  cent 
cultivated  by  the  owners  themselves.    This  is  a  favorable  state  of  affairs. 
There   are  few  countries,    except    new  ones  and   colonies,   in  which  the 
system  of  tenantry  occupies  so  small  a  place.     In  Great  Britain,  for  ex- 
ample, the  conditions  of  tenure  are  radically  different,  for  there  ten-elev- 
enths of  the  land  (according  to  Mulhall)  belong  to  one  two-hundredths  part 
of  the  population. 


614  PRINCIPLES   OF   POLITICAL  ECONOMY 


VI.  Plans  for  Nationalizing  the  Land 

The  classical  economists  themselves  grasped  the  nature 
and  essential  consequences  of  private  property  in  land. 
They  pointed  out  that  it  is  a  sort  of  monopoly,  justified  by 
present  custom,  but  hardly  defensible  on  grounds  of  social 
justice.  Naturally,  therefore,  social  reformers  have  long 
sought  to  bring  actual  conditions  into  better  harmony  with 
our  ideals  of  justice.  Not  only  full-fledged  socialists,  but 
economists  and  philosophers  having  little  sympathy  with 
socialism,  and  even  liberals  and  individualists,  have  either 
condemned  individual  property  in  land,  or  at  least  admitted 
the  desirability  of  some  kind  of  social  co-proprietorship  as  a 
corrective  of  its  disadvantages.  They  have,  in  other  words, 
suggested  an  extension  of  what  is  known  as  the  government's 
"right  of  eminent  domain,"  and  proposed  methods  for  re- 
forming, in  the  interests  of  society  as  a  whole,  the  institution 
of  property  in  land.1 

The  most  important  plans  for  reform  may  be  summarized 
as  follows  :  — 

(1)  The  perpetuity  of  property  rights  in  land  should  be  sup- 
pressed, and  a  system  of  leases  substituted  for  it.  The  govern- 
ment should  buy  the  land  and  lease  it  to  individuals  for  culti- 

1  We  cannot  here  discuss  the  agrarian  socialism  of  antiquity,  despite 
its  importance,  nor  devote  any  space  to  an  account  of  the  rise  of  land 
nationalization  schemes  in  the  various  countries  of  Europe.  The  names 
most  closely  associated  with  this  movement  are  as  follows :  In  Belgium, 
Colins  and  de  Laveleye  ;  in  Switzerland,  Le"on  Walras  and  Charles  Secre"tan  ; 
in  France,  Renouvier  and  Fouille'e  ;  in  Germany,  H.  H.  Gossen  and  M. 
Fliirscheim. 

In  England,  the  theory  of  land  nationalization  goes  back  at  least  as  far  as 
Thomas  Spence,  who  in  1775  advocated  the  "  parochializing "  of  land  "so 
that  there  shall  be  no  more  nor  other  landlords  than  the  parishes."  The 
most  eminent  of  recent  land  national izers  are  A.  R.  Wallace,  the  naturalist, 
and  a  school  of  Christian  socialists  who  teach  categorically  that  private 
property  in  land  is  illegitimate.  ("All  the  earth  is  mine,"  said  the  Lord.) 
Herbert  Spencer,  an  extreme  individualist,  expressly  condemned  landed 
property  in  his  earlier  works,  but  subsequently  changed  his  views  somewhat. 


PURCHASING    THE    LAND  615 

vation  during  periods  of  fifty,  seventy,  or  even  ninety-nine 
years,  in  much  the  same  manner  that  it  grants  franchises  to  rail- 
road companies.  When  this  time  had  elapsed,  the  government 
would  again  acquire  possession  of  the  land,  just  as  the  French 
government  will  acquire  the  ownership  of  French  railroads 
in  1950.  Then  the  government  could  lease  the  land  for  a 
new  period,  requiring  the  lessees  to  pay,  either  in  a  lump  sum 
or  in  annual  rent,  the  surplus  value  or  unearned  increment 
of  the  land.  In  this  way  the  government  or  the  "  State," 
representing  society  as  a  whole,  would  receive  all  the  un- 
earned increment,  and  collect  an  enormous  revenue  that 
would  ultimately  permit  the  abolition  of  all  taxes. 

Although  Leroy-Beaulieu  asserts  the  contrary,  such  a 
system  would  not  be  incompatible  with  good  husbandry ; 
the  greatest  undertakings  of  modern  times  —  such  as  rail- 
roads, the  Suez  Canal,  etc.  — have  been  carried  on  under  this 
system.  Precautions  should,  of  course,  be  taken  to  renew 
leases  a  sufficient  time  before  they  expire.  It  must  be  con- 
ceded that  this  arrangement  would  be  more  likely  to  promote 
good  husbandry  than  the  system  (now  prevailing  in  many 
countries)  under  which  almost  all  the  land  is  cultivated  by 
poor  tenants  who  may  be  sent  away  at  the  caprice  of  the 
landowner. 

But  the  execution  of  this  project  would  at  the  very  outset 
encounter  an  insurmountable  obstacle,  inasmuch  as  justice 
would  require  that  the  land  be  bought  from  its  present  owners 
at  an  equitable  price ;  and  this  would  be  absolutely  ruinous. 
The  present  value  of  land  in  this  country  is  probably  more 
than  thirty  billion  dollars,  i.e.  about  fifteen  times  the  total 
national  debt  of  the  United  States.  This  amount  would 
have  to  be  borrowed  to  indemnify  the  landowners.1 

1  A  few  years  ago  we  suggested,  as  a  practicable  scheme,  that  the  govern- 
ment purchase  the  lands  by  paying  for  them  immediately,  but  not  require 
their  actual  transfer  until  ninety-nine  years  afterward.  Under  these  circum- 
stances, land  could  be  bought  at  low  prices  ;  for  the  proprietor  would  compare, 
ou  the  one  hand,  the  relinquishment  of  his  property  at  a  time  so  far  distant 


616  PRINCIPLES    OF    POLITICAL    ECONOMY 

(2)  A  second  system,  advocated  by  the  elder  and  the  younger 
Mill,  and  perhaps  even  by  the  Physiocrats,  has  acquired 
widespread  celebrity  since  its  advocacy  by  Henry  George,1 
an  American,  under  the  name  of  single  tax  system.  It  con- 
sists simply  in  levying  an  increasing  tax  on  land  values,  the 
increase  being  so  adjusted  as  to  "  absorb  the  whole  economic 
rent,  or  what  is  sometimes  styled  the  unearned  increment  of 
land  values.  "2  Mr.  George,  who  must  not  be  called  a  social- 

that  neither  he  nor  even  his  grandchildren  would  suffer  from  it,  and  on  the 
other  hand,  the  sum  of  money  that  might  be  had  immediately.  Under  these 
circumstances,  he  would  hardly  hesitate  to  accept  -a  very  low  price. 

The  amounts  to  be  offered  can  be  calculated  by  means  of  annuity  tables  : 
$1000  to  be  paid  in  a  hundred  years,  i.e.  in  2003,  at  the  rate  of  5  per  cent 
would  now  be  worth  $7.98.  Thus  $30,000,000,000, —taking  this  to  be  the 
value  of  the  land  in  the  United  States,  —  deliverable  in  100  years,  are 
theoretically  worth  about  $240,000,000,  paid  now  in  cash. 

Professor  Leroy-Beaulieu,  while  designating  this  system  of  purchase  as 
"perhaps  the  most  ingenious"  of  all  that  have  been  proposed,  rejects  it  as 
impracticable.  We  will  admit  that  a  social  reform  for  which  we  must  wait 
a  hundred  years  is  not  worth  much.  The  rate  of  capitalization,  moreover, 
has  changed  since  the  above  plan  was  proposed,  and  the  whole  calculation 
must  be  greatly  modified.  At  the  present  customary  interest-rate  of  3  per 
cent,  many  more  million  dollars  would  have  to  be  paid  now  as  a  mathe- 
matical equivalent  of  thirty  billions  payable  one  hundred  years  hence. 

1  George's  book,    "Progress  and  Poverty,"    finished  in  1879,  has   been 
translated  into  several  foreign  languages  and  has  aroused  considerable  com- 
ment in  nearly  all  the  nations  of  Western  Europe. 

2  It  is  plain  that  the  two   "systems"  summarized  by  Professor  Gide 
resemble  each  other  very  closely.     The  difference  between  them  lies  mainly 
in  the  fact  that  Mr.  George  proposes  to  gradually  "tax  the  rent,"  while  the 
first  system  proposes  gradually  to  "  take  the  land."     The  first  system  is  in  no 
wise  incompatible  with  the  taxation  of  land  values,  but  it  lays  most  stress 
upon  the  actual  acquisition  of  the  land  by  public  authorities.     Mr.  George's 
system  would  "  tax  the  landlord  out  of  existence,"  and  is  opposed  to  indemni- 
fication.   The  first  system  seems  to  coincide  with  that  of  the  English  "  Land 
Nationalization  Society,"  which  proposes  to  pay  for  the  land.     The  second 
system,  on  the  other  hand,  appears  identical  with  that  of  the  English  "  Land 
Restoration  League,"  now  called  the  "League  for  the  Taxation  of  Land 
Values."     This  league  opposes  every  proposal  for  " land  purchase  "  or  "for 
creating  a  new  class  of  landlords  under  the  name  of  peasant  proprietors." 
It  should  be  noted,  however,  that  John  Stuart  Mill  contemplated  the  full 
compensation  of  the  existing  body  of  landowners. 


THE   SINGLE   TAX  617 

1st,  for  he  accepts  the  institution  of  private  property,  holds 
that  the  economic  rent  of  land  is  due  entirely  to  the  growth 
of  population,  which  increases  the  demand  for  products  of 
the  land,  and  raises  rents  ;  he  holds  that  a  "  single  tax,"  — 
equal  to  the  rental  value  of  all  land,  apart  from  improve- 
ments, —  would  yield  more  than  enough  to  support  the  gov- 
ernment and  would  make  all  other  taxation  unnecessary.1 

The  great  practical  objection  to  this  plan  is  that  there  are 
usually  two  elements  in  the  increased  value  of  land:  one  arises 
from  various  social  and  impersonal  causes ;  but  the  other  is 
due  to  the  labor  of  the  landowner,  or  at  least  to  the  capital 
that  he  has  advanced.  In  establishing  such  a  tax  we  should 
have  to  be  careful  not  to  touch  this  second  element  —  not  only 
for  fear  of  violating  the  principles  of  equity,  but  also  for  fear 
of  discouraging  all  spirit  of  enterprise  and  all  progress  in 
agriculture,  which  even  now  is  too  much  subject  to  routine. 
The  separation  of  these  two  elements,  however,  is  practically 
impossible  ;  the  landowner  himself  could  not  do  it  accurately, 
nor  would  a  public  officer  be  better  able  to  do  it. 

Note,  moreover,  that  if  society  profits  by  all  gains  in  the 
value  of  land,  on  the  ground  that  they  are  due  to  no  exertion 
or  sacrifice  on  the  part  of  the  owner,  it  is  in  equity  bound  to 
make  good  all  losses  arising  from  the  decreased  value  due 
to  social  causes  over  which  he  has  no  control,  —  and  this  for 
precisely  the  same  reasons.2 

Finally,  we  must  raise  the  same  objection  as  that  urged 
against  the  first  system.  The  confiscation  of  rent  by  taxa- 

1  Space  does  not  permit  a  detailed  examination  here  of  the  single  tax  sys- 
tem proposed  by  Mr.  George.     We  refer  the  reader  to  "  Progress  and  Pov- 
erty," and  to  the  following  literature:    Bliss,  "Encyclopaedia  of    Social 
Reform"  (articles  on  Land,  Land  Nationalization  and  Single  Tax);  Walker, 
"Political  Economy"  ;  Bullock,  "Political  Economy"  ;  Bastable,  "Public 
Finance";  Plehn,   "Public  Finance";  Ely,  "Taxation";    Seligman,  "Es- 
says  in   Taxation."     These  books  contain  a  discussion  of  the  economic, 
ethical,  practical,  and  financial  aspects  of  the  scheme. 

2  As  Francis  Walker  put  it :  "  '  Heads  I  win,  tails  you  lose,'  is  not  a  game 
at  which  the  state  can,  in  decency  or  fairness,  play  with  its  citizens." 


618  PRINCIPLES   OF   POLITICAL   ECONOMY 

tion  would  have  the  same  effect  as  the  confiscation  of  the 
land  itself.  It  would  destroy  the  value  of  land  as  such  and 
give  rise  to  the  necessity  for  paying  an  indemnity  to  the 
present  holders,  although  Henry  George  expressly  denies 
this.  The  ensuing  financial  difficulties  would  be  much  like 
those  already  pointed  out.1 

While  it  must  be  admitted  that  the  unqualified  ownership 
of  land  enables  the  land-holding  class  to  reap  an  unearned 
benefit  at  the  expense  of  the  community,  yet,  for  the  reasons 
given  above,  we  regard  land  nationalization  as  impracticable 
in  so  far  as  it  concerns  property  already  established.  But 
our  objections  are  not  entirely  valid  with  regard  to  future 
property,  that  is  to  say,  the  right  to  cultivate  new  lands. 
In  most  new  countries  and  colonies,  there  is  still  a  large 
public  domain  which  is  rapidly  being  cut  down  by  enormous 
grants  of  land,  or  sales  made  at  very  low  prices  by  the  gov- 
ernment. We  believe  that  the  government  could  easily  have 
retained  the  proprietorship  of  this  soil,  and  merely  granted 
leases  to  individual  cultivators.  In  this  way  the  government 
could  have  retained  control  of  property  that  will  ultimately 
become  very  valuable,  thus  making  it  much  easier,  perhaps, 
for  future  generations  to  solve  the  social  problem.2  But  the 
evil  effects  of  private  property  in  land  are  least  felt  in  those 
very  countries  in  which  it  would  be  an  exceedingly  simple 

1  Many  of  the  present  possessors  of  the  land  having  paid  the  full  price  in 
good  faith,  it  would,  as  Francis  Walker  declares,  be  simple  robbery  for  the 
state  to  reassert  its  interest  in  the  land  without  fully  indemnifying  the  owners. 
If  the  present  system  is  changed,  why  should  the  burden  be  thrown  upon  the 
single  class  of  landowners  ? 

2  Refer  to  the  note  on  page  600.    The  Dutch  government  has  followed  this 
plan  with  its  vast  colonial  possessions.    It  has  not  sold  the  land,  but  leased  it 
for  periods  of  about  75  years.    In  Australia  a  league  that  was  formed  for  the  pur- 
pose of  introducing  the  same  system  there  did  not  meet  with  success.    The  prin- 
ciple of  national  ownership  has  been  adopted  in  a  somewhat  platonic  form  by 
New  Zealand,  the  government  of  which  leases  the  land  for  a  period  of  999  years. 

Even  in  old  countries  this  plan  could  be  applied  in  the  case  of  mines. 
The  ownership  of  mines  is  distinct  and  different,  economically  and  legally, 
from  property  in  land. 


LANDED   PROPERTY   IN   NEW   COUNTRIES  619 

matter  to  prevent  them.  In  fact,  private  property  in  land 
has  innumerable  advantages  and  no  disadvantages  in  a  new 
country  still  in  the  early  stages  of  its  economic  development, 
-such  as  the  Argentine  Republic  or  Australia.  In  these 
countries,  landed  property  is  confined  to  areas  that  have 
been  cleared,  and  spreads  only  with  the  spread  of  cultiva- 
tion ;  hence  this  property  is  hallowed,  as  it  were,  by  labor. 
The  soil  under  private  ownership,  moreover,  represents  but 
a  fraction  of  the  whole  soil,  and  land  is  still  superabundant ; 
therefore,  land  and  agriculture,  like  any  other  commodity  or 
occupation,  are  subject  to  the  law  of  competition  and  do  not 
constitute  monopolies. 

With  the  development  of  society,  however,  and  as  the 
population  becomes  denser,  the  character  of  landed  property 
begins  to  change  and  gradually  acquires  the  nature  of  a 
monopoly;  this  monopolistic  nature,  moreover,  continually 
becomes  more  pronounced.  And  when  this  stage  is  reached, 
it  is  too  late  to  buy  back  the  land.1 

1  It  is  not  a  mere  coincidence  that  Henry  George's  theories  have  found  so 
wide  an  acceptance  in  Great  Britain,  where  there  is  now  no  general  customary 
access  to  portions  of  the  soil  for  the  great  mass  of  the  people,  and  where  the 
great  majority  of  the  population,  in  Ireland  as  well  as  England  and  Scotland, 
depend  on  a  few  landowners  both  for  a  dwelling-place  and  for  an  oppor- 
tunity to  carry  on  any  kind  of  production.  According  to  an  unsigned 
article  on  Land  in  Bliss's  "  Encyclopaedia  of  Social  Reform,"  "in  England 
only  one  person  in  twenty  is  an  owner  of  land ;  in  Scotland,  one  in  twenty- 
five  ;  in  Ireland,  one  in  seventy-nine  ;  and  the  great  majority  of  landholders 
in  Great  Britain  own  less  than  one  acre  each." 

Nor  is  it  a  simple  coincidence  that  the  greatest  American  advocate  of  the 
single  tax  made  most  of  his  observations  in  San  Francisco,  at  a  time  when 
the  number  and  wealth  of  the  population  was  increasing  at  a  marvellous  rate, 
and  many  fortunes  were  made  by  the  sale  of  unimproved  land,  the  value  of 
which  increased  enormously  in  a  very  brief  space  of  time.  It  is  in  large 
cities,  and  especially  in  rapidly  growing  cities  in  new  countries,  that  the 
unearned  increment  of  land  is  most  striking.  Take  an  example  of  this  : 
Mr.  F.  R.  Chandler,  a  Chicago  Real  Estate  Agent,  found  that  a  quarter  acre 
of  raw  prairie  land  now  at  the  intersection  of  two  prominent  business  streets 
in  that  city,  which,  in  1830,  was  worth  $20,  or  the  equivalent  of  13|  days' 
labor  at  $1.50  a  day,  in  1894  was  worth  $1,250,000,  or  the  equivalent  of 
2777  years'  labor. 


620  PRINCIPLES   OF   POLITICAL   ECONOMY 


VII.   The  Subdivision  of  Property  in  Land 

Social  evolution,  by  which  property  in  land  tends  ever 
more  closely  to  resemble  property  in  capital  or  commodities 
(see  page  605),  naturally  diminishes  the  evils  of  the  indi- 
vidual ownership  of  land. 

It  facilitates,  on  the  one  hand,  the  division  of  land,  thus 
distributing  the  land  among  a  large  number  of  persons.  Arid 
what  danger,  we  are  led  to  ask,  can  there  be  in  a  monopoly 
when  millions  of  men,  including  a  majority  of  the  citizens 
(as  in  the  United  States  and  France)  share  in  it  ? 

It  facilitates,  on  the  other  hand,  the  transfer  ability  of  land, 
that  is  to  say  its  rapid  and  frequent  change  of  ownership, 
thus  depriving  the  unearned  value  of  the  land  of  the  char- 
acter of  a  perpetual  and  increasing  advantage.  The  increase 
of  unearned  value,  being  as  a  rule  very  slow  and  intermittent, 
produces  scarcely  perceptible  effects  during  the  short  time 
that  the  property  is  in  the  possession  of  the  same  person; 
it  is,  moreover,  taken  into  account  whenever  the  land  changes 
owners. 

The  forces  which  bring  about  these  two  results  are  pri- 
marily economic.  But  legislative  bodies  are  certainly  able  to 
exert  great  influence  by  adopting  measures  for  either  favor- 
ing them  or  counteracting  them,  as  the  case  may  be. 

In  old  countries,  where  land  is  scarce,  the  establishment 
of  a  protectionist  system,  for  example,  would  manifestly  tend 
to  aggravate  the  monopolistic  character  of  land-ownership, 
whereas  free  trade  would  impair  it  by  admitting  the  compe- 
tition of  foreign  soils. 

Again,  the  laws  of  inheritance  are  potent  factors  for  good 
or  evil  in  this  respect.  In  England,  for  instance,  the  legis- 
lature, prompted  by  a  desire  to  maintain  the  position  of  the 
aristocracy,  which  has  helped  make  the  nation  great,  has 
established  a  number  of  "  rights  "  which  make  it  well-nigh 
impossible  to  alienate  the  land,  and  which  thus  keep  the 


PRIMOGENITURE   AND   ENTAIL  621 

land  almost  by  force  in  the  constant  possession  of  the  same 
family.  In  addition  to  countless  expenditures  and  formali- 
ties attending  the  transfer  of  land,  there  is  the  "right  of 
primogeniture,"  the  "right  of  entail,"  the  "right  of  substitu- 
tion," etc.  By  the  first  of  these  "  rights,"  the  eldest  son  in- 
herits the  real  estate  of  an  intestate  person,  in  exclusion  of 
the  younger  sons  and  all  the  daughters ;  by  the  second,  the 
inheritance  of  an  estate  is  limited  to  a  particular  class  of  per- 
sons and  its  sale  prohibited ;  by  the  third  a  series  or  succes- 
sion of  heirs  is  established,  from  which  the  law  allows  no 
deviation.  Because  of  such  devices  as  these  landed  property 
nowhere  appears  more  odious  than  in  Great  Britain.1 
Marked  by  the  original  and  indelible  stain  of  confiscations 
following  the  Norman  conquest  and  the  mastery  of  Ireland, 
and  the  wholesale  usurpation  carried  on  in  the  fifteenth  and 
sixteenth  centuries,  when  the  common  lands  came  into  the 
possession  of  the  landlords  (by  so-called  "  enclosure  "),  Great 
Britain  offers  the  scandalous  spectacle  of  colossal  fortunes 
obtained  without  exertion  and  increasing  with  the  growing 
number  and  wants  of  the  disinherited  masses. 

The  right  of  primogeniture  has  long  passed  away  in  the 
United  States,  and  almost  all  the  states  of  the  Union  nar- 
rowly limit  the  power  of  entailment.  Throughout  continen- 
tal Europe,  moreover,  these  and  similar  privileges  have  been 
curtailed  or  abolished.  In  France,  for  example,  since  the 
Revolution  of  1789,  the  law  requires  that  estates  shall  be 
divided  equally  among  all  the  children  of  deceased  parents, 
or,  in  the  absence  of  children,  among  the  other  relatives.2 

1  There  are  1,200,000  landowners  in  the  United  Kingdom,  but  the  immense 
majority  of  them,  at  least  three-fourths,  own  insignificant  plots  of  less  than 
an  acre ;  just  enough  for  a  cottage  and  garden.    A  more  accurate  idea  of  the 
distribution  of  land  may  be  obtained  from  these  facts,  together  with  the 
data  given  on  page  613,  note  2 :    Half  of  England  and  Wales  is  owned  by 
4500  persons,  half  of  Ireland  by  744  persons,  and  half  of  Scotland  by  only 
70  persons. 

2  Article  826  of  the  French  Civil  Code  decrees  not  only  that  an  estate  shall 
be  divided  into  parts  having  equal  values,  but  that  the  estate  itself  shall  actu- 


622  PRINCIPLES    OF   POLITICAL   ECONOMY 

This  has  had  quite  as  pronounced  an  effect  on  the  distribu- 
tion of  land  as  the  English  system,  but  in  precisely  the 
opposite  direction.  It  has  resulted  in  cutting  up  the  land 
into  small  sections.1  Unfortunately  this  system  does  not 
only  cut  up  the  large  estates,  but  it  also  divides  the  small 
ones  into  fragments,  and  thus  carries  the  partition  of  estates 
far  beyond  the  limits  compatible  with  good  husbandry.  It 
jeopardizes  the  interests  of  agriculture  without  accomplish- 
ing anything  in  the  interests  of  democracy.  It  even  violates 
the  aim  which  it  has  in  view,  for  after  the  division  of  estates, 
or  when  estates  are  sold  to  share  the  proceeds,  small  heri- 
tages are  often  purchased  at  ridiculously  low  prices  by  the 
owners  of  large  estates. 

ally  be  divided  into  equal  parts.  That  is  to  say,  the  smallest  plot  of  ground 
and  the  humblest  cottage  must  be  divided.  If  the  heirs  cannot  arrange 
matters  among  themselves,  the  estate  must  be  sold  by  the  authorities,  at  con- 
siderable expense  to  the  heirs. 

1  According  to  the  agricultural  statistics  for  1892,  persons  engaged  in  agri- 
culture in  France  were  classified  as  follows  :  — 

Owners  managing  their  own  farms        .         .         .     2,199,220  or  33% 
Farm-hands,  servants,  and  day-laborers  working 

for  an  employer 3,275,890  or  49% 

Persons  working  part  of  the  time  for  themselves 
and  part  as  day-laborers  or  farm-hands  for 

others 1,188,025  or  18% 

The  first  and  the  third  classes  comprise  independent  cultivators,  i.e.  those 
who  cultivate  their  own  farm  or  who  have  charge  of  its  cultivation.  The  total 
number  is  3,387,000,  which,  when  we  add  their  families,  means  a  population 
of  12,000,000  persons,  or  a  little  more  than  half  the  agricultural  popula- 
tion. (Compare  the  figures  for  the  United  States,  page  606,  note  2,  and  page 
613,  note  1.) 


CHAPTER   IV  — PROFITS 
I.    The  Nature  and  Definition  of  Profits 

WE  have  already  had  occasion  to  speak  of  the  important 
person  whom  economists  call  the  entrepreneur  (the  projector 
and  manager  of  an  enterprise),  and  we  know  that  his  income 
is  called  profits.  But  it  is  difficult  to  define  the  exact 
nature  of  his  function  and  of  his  income.  We  may  distin- 
guish the  following  three  explanations,  or  theories,  of  the 
part  played  by  the  entrepreneur  and  of  the  essential  nature 
of  profits  :  — 

(1)  English  economists  have  usually  regarded  the  entre- 
preneur and  the  capitalist  as  identical,  and  have  designated 
both  by  the  latter  name.  They  have  therefore  regarded 
profits  as  a  capitalistic  income,  analogous  to  interest,  but 
fixed  at  a  somewhat  higher  level  for  reasons  which  we  shall 
state  presently. 

It  must  be  admitted  that  this  way  of  looking  at  things 
seems  quite  in  conformity  with  facts.  In  practice,  it  is  the 
entrepreneur  who  possesses  all,  or  at  least  part,  of  the  capital 
necessary  for  carrying  on  a  business  enterprise.  In  practice, 
the  rate  of  profit  goes  hand  in  hand  with  the  rate  of  interest 
and  is  calculated  in  the  same  way,  viz.  as  a  certain  "per 
cent "  of  the  capital  employed.  It  is  considered  natural  that 
the  entrepreneur  who  has  "  put  into  "  an  enterprise  $1,000,000 
should  realize  ten  times  as  much  profit  as  an  entrepreneur 
who  has  employed  only  1100,000. 

This  interpretation,  however,  must  be  abandoned,  for 
although  the  entrepreneur  is  generally  also  a  capitalist,  this 
is  not  so  because  of  any  necessary  connection  between  their 
functions ;  but,  as  we  shall  see,  only  because  capital  confers 

623 


624  PRINCIPLES   OF   POLITICAL   ECONOMY 

on  its  possessor  a  kind  of  monopoly.  The  part  of  the 
entrepreneur  and  that  of  the  capitalist  are  nevertheless 
distinct  in  theory  and  sometimes  separate  in  practice ;  for 
there  are  entrepreneurs  who  are  not  capitalists  and  who 
carry  on  business  only  by  means  of  borrowed  capital. 

(2)  French  economists,  on  the  other  hand,  and  first  of  all 
J.  B.  Say,  clearly  separated  the  part  of  the  entrepreneur  from 
that  of  the  capitalist,  and  regarded  the  former  as  economi- 
cally distinct  from  the  latter;  they  invented  the  name  by 
which  he  is  now  known.  In  their  opinion,  the  predominant 
characteristic  of  the  entrepreneur  is  the  performance  of  a 
certain  kind  of  labor.  Profits,  therefore,  are  the  remunera- 
tion of  labor ;  but  of  a  particular  kind  of  labor,  different 
from  manual  labor,  superior  to  it  from  the  standpoint  of 
productivity,  and  consisting  of  the  following  elements :  — 

(a)  Invention,  which,  as  we  have  seen,  is  the  primordial 
act  of  production  (page  74).  All  great  industrial  fortunes 
are  the  result  of  inventions  (Bessemer  steel,  Singer  sewing- 
machines,  etc.).  The  truly  productive  act  is  thought,  the 
conception  of  ideas.  The  entrepreneur  must  have  ideas,  — 
not  necessarily  sparks  of  genius,  but  business  ideas,  —  and, 
above  all,  he  must  discover  what  will  please  the  public. 
It  is  not  enough  for  the  entrepreneur  to  invent  new  com- 
modities or  new  varieties  of  commodities  ;  he  must,  so  to 
speak,  invent  new  wants. 

(5)  Superintendence.  It  is  a  fundamental  law  of  political 
economy  that  collective  labor  is  more  productive  than  isolated 
labor,  on  condition,  however,  that  it  be  organized,  disciplined, 
and  commanded  by  some  one.  There  must  be  somebody  to 
divide  the  work  and  give  every  laborer  his  proper  place. 
This  is  the  part  of  the  entrepreneur,  and  for  this  reason  he 
is  called  the  "captain  of  industry."  Business,  in  fact,  is 
very  much  like  war.  The  commander-in-chief  wins  or 
loses  the  battle.  No  doubt  good  soldiers  and  good  weapons 
contribute  to  the  victory,  but  they  are  the  conditions  of 
success,  not  the  real  cause.  One  proof  of  this  consists  in 


THE   NATURE   AND   DEFINITION   OF   PROFITS  625 

the  fact  that  good  troops  with  the  best  equipment  will  be 
beaten  if  they  are  badly  commanded.  In  business  matters, 
too,  generalship  is  everything.  Everyday  experience  shows 
that  of  two  enterprises  employing  an  equal  number  of  work- 
men possessing  the  same  ability,  one  succeeds  and  the  other 
fails  miserably,  simply  because  one  has  better  leadership. 

(c)  Commercial  speculation.  It  is  no  difficult  matter  to 
produce  goods.  The  great  problem  is  to  sell  them,  —  to  find 
a  market  for  what  has  been  produced.  Hence,  business 
enterprises  now  tend  more  and  more  to  become  speculative 
in  character.  In  other  words,  business  consists  to  an  in- 
creasing degree  of  the  art  of  buying  and  selling  on  the  most 
favorable  terms.  This  art  is  one  of  the  principal  accom- 
plishments of  the  successful  entrepreneur.  It  is,  moreover, 
of  the  greatest  social  importance,  inasmuch  as  commercial 
speculation  reestablishes  the  economic  equilibrium  constantly 
disturbed  by  production  and  consumption. 

There  is  much  truth  in  this  second  explanation  also. 
Nevertheless,  it  does  not  set  forth  clearly  the  essential 
nature  of  profits,  nor  does  it  entirely  escape  the  suspicion 
that  it  was  devised,  at  least  in  part,  for  the  purpose  of  de- 
fending profits  against  the  attacks  of  socialists.  Every  one 
of  the  tasks  above  enumerated  as  belonging  to  the  entre- 
preneur —  invention,  commercial  speculation,  and  even 
superintendence  —  may  be  committed  to  the  exclusive 
charge  of  hired  employees  (engineers,  chemists,  buyers,  com- 
mercial agents,  managers,  superintendents,  etc.).  And,  as 
a  matter  of  fact,  all  large  enterprises  organized  as  "com-* 
panics  "  employ  men  to  perform  the  several  tasks  of  the 
so-called  entrepreneur. 

(3)  A  great  many  economists,  finally,  consider  the  entre- 
preneur as  possessing  a  monopoly,  somewhat  like  that  of  the 
landowner,  yet  differing  from  it  in  some  important  respects. 
Profits,  therefore,  are  a  monopolistic  income  or  so-called 
"monopoly  surplus."  This  monopoly  may  be  a  natural  one, 
resulting  from  exceptional  personal  abilities  or  from  certain 


626  PKINCIPLES   OF   POLITICAL   ECONOMY 

advantages  of  situation  or  opportunity.  Or  it  may,  on  the 
other  hand,  be  a  legal  monopoly,  and  be  due,  for  example, 
to  a  protective  tariff,  or  to  the  exclusive  possession  of 
certain  inventions.  It  may  be  due  to  any  of  a  host  of  cir- 
cumstances, for  monopolies  are  by  no  means  exceptional. 
The  monopoly  element  is  present  everywhere.  The  small 
grocery  store  at  the  street  corner  enjoys  a  monopoly  because 
of  its  location.  A  man's  individuality,  that  is  to  say  the 
simple  fact  that  he  is  himself  and  not  some  one  else,  really 
constitutes  a  monopoly. 

This  theory  is  most  consistent  with  facts.  It  explains, 
moreover,  why  the  entrepreneur  generally  happens  to  be  also 
a  capitalist.  As  no  business  can  be  undertaken  without  a 
certain  amount  of  capital,  and  the  necessary  capital  must 
often  be  borrowed,  the  possession  of  capital  really  consti- 
tutes a  monopoly  that  can  be  made  to  provide  a  revenue 
for  the  owner.  It  also  explains  why  exceptional  personal 
qualities,  such  as  those  pointed  out  by  the  partisans  of  the 
theory  that  profit  is  due  to  labor,  may  be  the  source  of  large 
profits  and  of  great  wealth  —  simply  because  these  qualities 
also  constitute  monopolies. 

We  must  not  conclude  that  profits  are  necessarily  unjust ; 
we  have,  in  fact,  already  admitted  that  in  many  cases  mo- 
nopoly is  more  in  conformity  with  the  public  interest  than 
competition.  (See  page  152,  etc.) 

Those  who  become  wealthy  because  of  exceptional  personal 
ability  do  no  harm  to  others.  Again,  the  monopoly  of  entre- 
preneurs consists  not  in  their  being  able  to  sell  goods  above 
the  current  prices,  but  in  the  possession  of  a  secret  or  of 
some  advantage  which  enables  them  to  make  goods  at  less 
than  the  ordinary  cost  of  production ;  and  decreased  cost  is 
in  perfect  harmony  with  public  welfare.1 

1  At  all  events,  it  should  be  noted  that  whenever  there  is  any  injustice  on 
the  part  of  entrepreneurs,  the  consumer,  i.e.  the  purchaser  of  the  goods,  is 
usually  the  victim  of  the  monopoly,  rather  than  the  workmen  engaged  in  the 
enterprise. 


THE   LAWS    WHICH    DETERMINE   PROFITS  627 


II.     The  Laws  which  determine  Profits 

How  are  profits  calculated?  Nothing  would  seem  to  be 
easier.  The  manager  or  owner  of  the  smallest  enterprise 
knows  perfectly  well  how  to  find  out  what  his  profits  are. 
He  simply  subtracts  the  cost  of  production  from  the  value 
of  the  finished  product  (i.e.  its  current  price  in  the  market), 
and  calls  the  remainder  his  profit. 

Yet  this  apparently  simple  operation  involves  one  of  the 
difficult  points  of  theoretical  economics.  The  difficulty  con- 
sists in  determining  precisely  what  should  be  included  under 
the  "cost  of  production." 

It  should  include,  first, — there  is  no  difficulty  on  this 
score,  —  the  wages  paid  by  the  entrepreneur  to  the  laborers 
in  his  employ  ;  it  should  also  include,  in  case  he  has  bor- 
rowed all  or  part  of  the  capital,  the  interest  he  must  pay  to 
the  capitalist.  These  are  the  two  essential  parts  of  the  cost 
of  production.  If  we  let  V  represent  the  value  of  the  fin- 
ished product,  W  the  wages,  and  I  the  interest,  then  P,  the 
profit,  would  be  determined  by  this  simple  formula :  — 

P  =  V-  (TT+J). 

But  are  not  several  elements  missing  from  this  formula? 
Why  does  it  not  include  rent,  as  well  as  interest  and  wages  ? 
The  entrepreneur  is  supposed,  theoretically,  to  unite  the 

Profit  differs  from  land-rent  for  two  reasons  :  — 

(1)  Because  the  monopoly  due  to  land-rent  always  possesses  a  real,  im- 
personal, and  more  or  less  permanent  character,  while  profit  is  of  a  personal 
and  temporary  nature. 

(2)  Because  land-rent  arises  either  (as  Ricardo  thought)  from  the  increase 
in  the  cost  of,  production,  or  (what  is  more  strictly  true)  from  the  increase 
of  human  wants  ;  whereas  profit,  as  we  have  just  said,  is  generally  due  to  a 
decreased  cost  of  production  in  certain  industries  or  establishments. 

Although  the  maximum  cost  of  production  alone  governs  the  rent  of  land, 
the  minimum  cost  of  production  sooner  or  later  regulates  the  rate  of  profit, 
because  the  monopolist  will  ultimately  be  ousted  from  his  privileged  position 
by  other  entrepreneurs,  and  because,  moreover,  it  is  in  his  own  interest  to 
lower  prices.  (See  page  589,  note  1.) 


628  PRINCIPLES    OF    POLITICAL   ECONOMY 

factors  of  production,  which  include  not  only  labor  and  capi- 
tal, but  land  also.  In  practice,  moreover,  he  often  has  to 
rent  land.  Why,  then,  does  the  "  cost  of  production  "  not 
include  the  expense  of  obtaining  the  third  factor  of  produc- 
tion, as  well  as  the  cost  of  the  other  two  ? 

Economists  of  the  English  school  answer,  —  basing  their 
reply  on  Ricardo's  theory  —  that  the  rent  of  land  is  never  a 
part  of  the  cost  of  production,  because  it  is  the  cost  of  pro- 
duction which  determines  rent.  (See  page  587.)  But  this 
doctrine  is  too  absolute.  In  all  cases  where  rent  is  the 
price  of  a  genuine  monopoly,  such  as  buildings  and  land 
situated  in  cities  or  near  a  waterfall  serviceable  for  produc- 
tive purposes,  it  is  certainly  part  of  the  cost ;  and  if  the 
entrepreneur  is  obliged  to  pay  rent  for  such  truly  monopo- 
listic advantages,  this  rent  should  be  counted  as  part  of  the 
cost  of  production,  in  addition  to  wages  and  interest.  In 
brief,  the  entrepreneur  should  deduct  from  the  value  of  the 
product  the  shares  due  to  all  his  collaborators.  Nothing 
could  be  plainer  than  this.1 

But  the  entrepreneur  generally  furnishes  something  him- 
self,—  perhaps  the  land  and  buildings,  perhaps  all  or  a 
part  of  the  capital,  and,  in  any  case,  the  labor  of  a  certain 
amount  of  organization  and  superintendence.  Should  not 
the  rent  of  this  land,  the  interest  on  this  capital,  and  the 
wages  for  this  labor  also  be  reckoned  as  part  of  the  cost 
of  production?  What  does  it  matter  that  these  elements 
happen  to  be  furnished  by  the  entrepreneur  personally,  and 

1  It  follows  from  the  above  that  for  the  entrepreneurs  the  cost  of  produc- 
tion consists  of  the  incomes  received  by  their  collaborators  in  production, 
that  is  to  say,  the  incomes  of  the  other  classes  of  society :  wage-workers, 
landowners,  and  capitalists.  Must  these  incomes  be  counted  as  the  cost  of 
production  for  the  nation  as  a  whole  ?  Certainly  not.  For  the  nation,  the 
cost  of  production  is  different  from  that  of  the  entrepreneur.  The  cost  of 
production  for  the  nation  consists  of  the  sum  total  of  values  consumed  {i.e. 
destroyed)  in  the  process  of  production,  —  the  value  of  the  circulating  capital 
and  only  the  cost  of  renewing  fixed  capital,  —  and  profit  consists  of  the  differ- 
ence between  the  values  produced  and  the  values  consumed. 


WHAT   IS   THE   COST    OF   PRODUCTION?  629 

that  he  has  no  need  to  employ  or  borrow  them  ?  Is  he  not  a 
landlord  or  capitalist  or  wage-earner  if  he  furnishes  land 
or  capital  or  labor  ?  If  he  had  not  applied  this  land,  capital, 
or  labor  to  his  own  business,  he  could  have  used  them  else- 
where ;  he  might  have  rented  his  land  and  buildings  to  a 
tenant,  invested  his  capital  in  some  one  else's  business,  and 
applied  his  labor  and  intelligence  in  some  other  enterprise. 
His  own  business  ought  therefore  to  yield  at  least  enough  to 
pay  him  the  equivalent  of  what  he  could  have  received  in 
any  other  way,  else  he  will  not  engage  his  land,  capital,  labor, 
or  intelligence  in  this  enterprise.1 

But  how  are  we  to  ascertain  the  value  of  the  various  pro- 
ductive elements  furnished  by  the  entrepreneur  personally  ? 

As  for  land  and  buildings,  nothing  could  be  more  simple. 
Find  out  what  the  entrepreneur  would  have  been  obliged  to 
pay  to  obtain  similar  land  and  buildings  from  another 
landlord. 

As  for  the  capital,  the  matter  is  equally  simple.  Find  out 
the  current  rate  of  interest,  —  that  which  the  entrepreneur 
would  be  compelled  to  pay  for  borrowed  capital,  and  what 
he  probably  does  pay  for  capital  that  he  actually  borrows. 
As  a  matter  of  fact,  in  every  accurate  system  of  accounts 
the  entrepreneur  distinguishes  the  interest  on  his  capital 
from  the  other  receipts  of  an  enterprise.  This  interest, 
however,  should  be  estimated  at  a  higher  rate  than  the 

1  Yet  if  we  examine  closely  the  enterprises  that  are  carried  on  in  any 
country,  it  would  certainly  not  be  difficult  to  find  some  that  do  not  yield 
enough  to  pay  the  current  rate  of  interest  on  the  capital  engaged  in  them. 
Why,  in  spite  of  this,  are  they  still  carried  on  ? 

This  apparent  anomaly  is  easily  explained  when  we  examine  into  the 
nature  of  the  capital  engaged  in  these  businesses.  If  it  consists  largely  of 
fixed  capital,  it  is  next  to  impossible  to  transfer  this  capital  to  some  other 
business,  even  should  the  owner  desire  to  do  so.  The  only  thing  to  be  done, 
therefore,  is  :  either  to  abandon  this  capital  entirely  and  count  it  as  just  so 
much  wasted  wealth,  or  be  content  with  whatever  return  it  happens  to  yield, 
no  matter  how  small.  The  second  alternative  is  clearly  preferable  ;  for  it  is 
better  to  lose  part  of  one's  capital  than  lose  it  all.  This  state  of  affairs 
occurs  frequently  with  railroad  companies,  traction  companies,  mines,  etc. 


630  PRINCIPLES    OF    POLITICAL   ECONOMY 

current  rate  of  interest,  because  the  return  from  capital 
engaged  in  direct,  active  production  is  variable,  whereas 
the  income  arising  from  loaned  capital  is  fixed. 

Take,  for  illustration,  a  business  which  yields  returns  so 
variable  that  every  other  year  there  are  no  profits.  Should 
the  current  rate  of  interest  on  loans  be  jive  per  cent,  the 
entrepreneur's  return  on  his  own  capital  must  be  ten  per 
cent,  in  order  to  produce  an  income  averaging  as  high  as 
that  due  to  the  loan  of  capital  at  the  current  rate  of  interest. 
This  difference  in  rates  is  a  premium  for  insurance  against 
risks.1 

The  problem  is  a  more  difficult  one  with  regard  to  the 
personal  labor  of  the  entrepreneur.  What  compensation 
ought  he  to  receive?  Economists  answer  that  he  should 
receive  the  same  compensation  as  that  which  he  would  be 
obliged  to  pay  an  employee  able  to  take  his  place  (i.e.  a 
manager  or  director),  or  whatever  he  himself  could  expect 
to  receive  if  his  services  were  engaged  by  another  employer. 
This  remuneration  is,  doubtless,  fixed  very  arbitrarily. 
Many  entrepreneurs,  however,  keep  an  account  of  the  salary 
which  they  attribute  to  their  own  services,  and  enter  this 
item  on  their  books  as  part  of  their  expenses.2 

1  This  " insurance  premium"  against  the  entrepreneur's  risks  must  not 
be  confounded  with  the  "premium"  referred  to  as  constituting  part  of  the 
interest  for  capital  as  commonly  understood  (page  567).     The  latter  con- 
cerns the  possible  loss  of  loaned  capital,  while  the  former  has  to  do  only  with 
the  variability  of  the  entrepreneur's  income.     This  premium  plays  no  part  in 
the  case  of  the  capitalist  who  invests  in  all  the  industrial  enterprises  of  a 
nation,  or  in  all  the  enterprises  engaged  in  any  one  "branch  of  production, 
such  as  coal-mining.      Careful  capitalists  do  not  "put  all  their  eggs  into 
one  basket." 

2  There  can  be  no  doubt  that  the  salary  which  the  employer  will  regard  as 
a  sufficient  payment  for  his  own  services  will  be  larger  than  that  which  he 
would  pay  to  an  employee  of  equal  ability.     It  will  even  be  greater  than  that 
which  he  could  expect  to  receive  if  he  were  in  the  employ  of  another  entre- 
preneur.   This  is  natural  and  just ;  for  we  must  take  into  account  the  respon- 
sibilities, the  anxieties,  and  risks  of  the  entrepreneur's  occupation.     We  do 
not  now  refer  to  the  danger  of  losing  his  capital  (which  has  already  been 
taken  into  account),  but  the  risk  of  losing  his  economic  position  and  his 


THE   LAWS   WHICH   DETERMINE   PROFITS  631 

These,  then,  are  nearly  all  the  elements  in  the  cost  of  pro- 
duction.1 All  we  have  to  do  now  is  to  add  them,  and  deduct 
the  total  from  the  value  of  the  product ;  what  remains  is 
profit.  But  when  we  have  taken  into  account  all  the  ele- 
ments enumerated  above,  and  deducted  them  from  the  gross 
results  of  an  enterprise,  it  is  not  at  all  improbable  —  how- 
ever surprising  this  may  appear  —  that  there  will  be  nothing 
left. 

There  will  be  a  remainder  only  when  the  value  of  the 
finished  product  exceeds  the  total  cost  of  production,  and 
this  is  possible  only  when  the  entrepreneur  is  in  possession 
of  some  sort  of  monopoly.  (See  page  194,  note.)  But  if 
there  is  no  monopoly-element,  if  industry  is  entirely  subject 
to  free  and  full  competition,  —  that  is  to  say,  if  the  entre- 
preneur brings  nothing  on  the  market  except  what  anybody 

business  reputation.  If  a  man  could  not  earn  more  as  an  entrepreneur  than 
as  manager  or  superintendent  for  some  one  else,  it  would  be  better  for  him 
to  enter  some  one's  else  employ  ;  he  would  at  least  gain  peace  of  mind  by 
the  change.  As  a  matter  of  fact,  many  persons  offer  their  business  intelli- 
gence and  organizing  abilities  to  others,  rather  than  undergo  the  constant 
worry  and  mental  strain  involved  in  carrying  on  their  own  business  under  a 
system  of  keen  competition  and  frequent  industrial  collapses  against  which 
even  the  wisest  and  most  far-sighted  men  are  unable  always  to  make  ample 
provision. 

1  Should  not  the  cost  of  the  raw  materials  and  the  cost  of  transportation 
occupy  an  important  place  in  a  list  of  the  expenses  of  production?  From 
the  standpoint  of  the  individual  entrepreneur,  they  must  be  counted.  But 
when  we  are  attempting  to  determine  profits  in  general,  i.e.  for  all  enter- 
prises, they  must  be  omitted,  because  the  cost  of  raw  materials  is  in  turn 
made  up  of  wages,  interest,  and  the  returns  of  the  preceding  entrepreneur ; 
this  entrepreneur's  raw  materials  are  in  turn  made  up  of  the  same  ele- 
ments, and  so  on  until  we  reach  the  first  links  in  the  chain  of  productive 
activities. 

If  our  calculation  of  the  costs  of  production  is  to  be  perfectly  correct  and 
complete,  however,  there  are  other  elements  which  must  be  included,  e.g. 
the  cost  of  renewing  capital  which  exists  in  the  form  of  concrete  goods,  and 
taxes  paid  to  the  government,  which  may  be  regarded  as  an  indirect  col- 
laborator in  production  who  insists  on  receiving  a  share  of  the  proceeds. 
The  cost  of  renewing  capital  plays  no  part  in  the  case  of  money-capital, 
which  is  a  kind  of  wealth  neither  perishable  nor  subject  to  wear  and  tear. 
(See  page  572,  note  3.) 


632  PRINCIPLES   OF   POLITICAL   ECONOMY 

else  can  offer, — there  is  no  profit.  This  fact  need  cause  no 
surprise.  It  is  a  necessary  consequence  as  well  as  a  con- 
firmation of  the  definition  of  profits  given  in  the  preceding 
section.  It  is,  moreover,  both  inevitable  and  just. 

It  is,  first,  inevitable.  For  if  competition  among  entre- 
preneurs is  free  and  complete,  they  will  always  engage  in 
those  enterprises  which  hold  out  the  inducement  of  a  profit. 
Competition  among  entrepreneurs  will  tend  to  keep  the 
value  of  products  exactly  on  a  level  with  their  cost  of 
production.  (See  page  139.) 

It  is,  in  the  second  place,  just.  For  when  the  entrepreneur 
has  received  —  above  and  beyond  the  parts  of  the  product 
which  he  is  obliged  to  give  to  his  collaborators  in  production 
—  the  interest  on  his  own  capital,  an  indemnity  for  all  the 
risks  he  has  incurred,  and  an  equitable  compensation  for  his 
labor  of  superintendence,  what  more  can  he  properly  claim  ? 1 

III.   The  Legitimacy  of  Profits 

In  more  than  one  sense,  the  entrepreneur  plays  a  leading 
part  in  modern  industrial  life.  For  this  reason  he  is  the 
principal  target  of  socialistic  attacks. 

1  Professor  Walras  employs  a  formula  which  at  first  seems  astounding 
when  he  declares  that  the  normal  rate  of  profits  is  zero.  By  this  statement 
he  means  that  upon  the  supposition  of  absolutely  free  competition  —  a 
hypothesis  which  serves  as  the  very  basis  of  this  author's  system  of  mathe- 
matical equations  concerning  economic  forces  —  the  price  which  the  entrepre- 
neur pays  for  productive  services  (including  his  own)  must  necessarily  be 
equal  to  the  price  for  which  he  sells  the  finished  product ;  profits  must  there- 
fore be  equal  to  zero. 

This  amounts  to  saying  that  the  sole  normal  income  of  the  entrepreneur 
is  that  which  he  receives  as  remuneration  for  his  labor  or  for  the  use  of  his 
capital,  and  that  the  surplus  (which  is  generally  called  profit)  is  purely 
accidental. 

Walras's  theory,  which  at  first  appears  paradoxical,  will  become  plainer 
if  we  examine  profit  in  its  simplest  form  —  that  of  dividends.  Take  two 
capitalists,  each  of  whom  has  invested  the  same  amount  in  the  same  enter- 
prises, the  first  having  purchased  only  shares  of  stock,  the  second  only  inter- 
est-bearing securities.  In  this  case,  the  theory  stated  above  means  simply 
that  in  the  long  run  —  say  fifty  years  —  both  of  these  capitalists  will  receive 


LEGITIMACY   OF   PROFITS  633 

Robert  Owen  declared  nearly  a  hundred  years  ago  that 
profit  is  the  fundamental  cause  of  all  economic  ills,  and 
endeavored  to  abolish  profit  by  means  of  a  "Labor  Ex- 
change,"1 at  which  laborers  could  exchange  their  products 
for  labor  coupons  and  use  these  coupons  to  purchase  what- 
ever they  wanted,  without  having  anything  to  do  with  an 
entrepreneur  and  therefore  without  having  to  pay  him  a 
tribute  in  the  form  of  profits. 

But  the  socialistic  objections  to  the  entrepreneur  were 
more  or  less  vague  and  indefinite  until  the  publication  of 
Karl  Marx's  book  on  Capital.  The  arguments  which  this 
formidable  adversary  brings  to  bear  against  the  institution 
of  profits  are  summarized  in  the  following  paragraphs.2 

The  comparison  established  by  some  economists  between 
the  entrepreneur  and  the  laborer,  says  Marx,  is  absurd,  or  at 
least  out  of  date.  There  was  a  time  when  the  employer 
worked  side  by  side  with  his  workman,  primus  inter  pares, 
and  could  properly  be  considered  as  a  worker  and  a  producer. 
The  same  condition  of  affairs  may  even  now  be  found,  by 
way  of  exception,  in  small  scale  industries.  But  under  the 

exactly  the  same  total  income,  despite  the  fact  that  one  receives  only  interest 
and  the  other  only  dividends.  This  conclusion,  we  believe,  will  be  accepted 
as  true  by  experienced  business  men. 

It  is  even  possible  that  when  all  is  taken  into  account,  the  income  consist- 
ing of  dividends  will  be  smaller  than  that  in  the  form  of  interest,  because 
men  are  usually  disposed  to  overestimate  the  chances  of  success  in  an  enter- 
prise, and  to  underestimate  the  possibilities  of  failure. 

1  Owen's  Labor  Exchange  must  not  be  confounded  with  De  Molinari's 
scheme  of  a  kind  of  bureau  where  workers  may  obtain  information  regarding 
the  demand  and  supply  for  various  kinds  of  labor,  although  the  latter  scheme 
is  also  known  as  a  labor  exchange  (Bourse  de  Travail).     (See  page  535, 
note  1.) 

2  We  have  already  pointed  out,  in  connection  with  our  discussion  of  the 
legitimacy  of  interest,  that  the   so-called  scientific  socialists  (Rodbertus, 
Marx,  Lasselle,  etc.)   regarded  the  incomes  of  landlords,   capitalists,  and 
entrepreneurs  as  essentially  of  the  same  nature  ;  each  of  them  is  held  to  be 
due  to  the  spoliation  of  the  working  classes.     The  essential  features  of  the 
"  exploitation  theory  "  are  the  same  with  regard  to  profits  as  with  regard  to 
interest.     (See  page  500.) 


634  PRINCIPLES    OF   POLITICAL   ECONOMY 

system  of  large-scale  production,  —  manifestly  the  sole  pro- 
ductive method  of  the  future,  —  the  employer  is  exclusively 
a  capitalist.  He  happens  to  be  an  employer  simply  because 
he  is  rich,  just  as  under  the  ancien  regime  in  Europe  certain 
men  became  army  officers  simply  because  they  belonged  to 
the  nobility.  The  employer  derives  profit  from  his  capital 
just  as  any  other  merchant  does,  i.e.  by  buying  and  selling 
goods.  What  does  he  buy  ?  The  productive  power  of  the 
workman,  known  as  labor.  What  does  he  sell  ?  The  same 
power  transformed  and  made  concrete  in  the  shape  of  com- 
modities. The  difference  between  the  two  constitutes  his 
profit. 

But  how,  according  to  Marx's  theory,  can  there  be  any 
such  difference  or  profit-constituting  surplus  ?  For  we 
must  not  forget  that,  according  to  Karl  Marx,  the  sole  value- 
producing  factor  is  labor.  Does  it  not  follow  that  the  fin- 
ished product  cannot  be  worth  more  on  the  market  than  the 
labor  of  the  workmen  who  made  it,  and  that  therefore  profit 
cannot  arise  ?  The  solution  of  this  knotty  problem,  this 
"mystery  of  iniquity,"  constitutes,  in  the  opinion  of  many 
socialists,  Marx's  chief  claim  to  scientific  glory.  Let  us 
listen  to  the  socialistic  argument. 

The  value  of  products  offered  for  sale  by  the  entrepreneur 
is  determined  by  the  labor  which  it  cost  to  produce  them. 
Suppose  a  workman  takes  ten  hours  to  produce  a  given 
article  :  the  value  of  that  article  is  equal  to  ten  hours  of 
labor.  But  it  does  not  follow  that  the  entrepreneur  must 
pay  the  workman  a  wage  equivalent  to  ten  hours'  labor. 
He  pays  the  workman  just  what  his  labor  is  worth.  And 
the  worth  of  his  labor,  like  the  value  of  a  machine  or  any 
other  commodity,  is  determined  by  the  cost  of  production. 
When  we  have  to  do  with  the  productive  machine  called 
"  man,"  producing  the  commodity  called  "  labor,"  the  cost 
of  production  means  simply  the  expense  necessary  to  raise 
(i.e.  to  produce)  a  workman  and  to  keep  him  fit  for  work 
(i.e.  to  support  him).  Let  us  assume  that  the  expenditure 


PROFITS    ARE    LEGALIZED   ROBBERY  635 

necessary  to  support  the  laborer  and  to  keep  him  in  fit  con- 
dition is  equal  to  five  hours'  labor  a  day,  on  the  average. 
In  this  case  the  employer,  by  giving  the  laborer  wages 
equivalent  to  five  hours'  labor,  pays  him  just  what  his  labor 
is  worth,  according  to  the  laws  of  value  and  exchange.  Yet 
it  is  evident  that  the  employer  thus  makes  a  large  gain. 
He  pays  only  the  equivalent  of  five  hours'  labor,  and  by 
the  sale  of  the  product  he  realizes  the  equivalent  of  ten 
hours'  labor.  Hence  he  gets  five  hours'  labor  without  pay- 
ing for  it  —  five  hours'  labor  which  the  workman  furnishes 
gratuitously  for  the  benefit  of  his  employer.  The  employer's 
profit,  therefore,  is  a  certain  amount  of  unpaid  labor.  This 
is  the  whole  secret  of  capitalistic  exploitation. 

Is  the  objection  raised  that  the  above  figures  are  arbitrary 
suppositions  ?  To  be  sure  they  are.  But,  says  Marx,  there 
is  nothing  arbitrary  or  imaginary  in  the  general  rule  that  the 
value  produced  by  a  man's  labor  is  greater  than  the  value  required 
to  support  him.  This  is  true  even  of  the  isolated  laborer  in 
primitive  society;  else  civilization  could  never  have  begun, 
nor  could  population  ever  have  increased.  How  much 
truer,  therefore,  it  must  be  with  regard  to  the  civilized 
laborer  whose  productive  power  is  multiplied  by  the  divi- 
sion of  labor  and  by  collective  organization!  The  employer, 
having  acquired  possession  of  this  power  by  purchasing  it, 
invents  a  multitude  of  ingenious  schemes  for  increasing  its 
productivity,  —  such  as  lengthening  the  day  of  labor,  stimu- 
lating the  workman  to  increased  effort  by  the  deceptive 
device  of  "piece  wages,"  and  introducing  machinery  that 
enables  him  to  make  profitable  use  of  the  cheap 'labor  of 
women  and  small  children. 

The  price  which  the  employer  pays  for  manual  labor, 
moreover,  varies  directly  with  the  laborer's  cost  of  living ; 
and  the  progress  of  civilization  tends  constantly  to  decrease 
this  cost.  If  it  were  possible,  for  example,  to  increase  the 
productivity  of  labor  so  greatly  that  five  minutes  would  be 
enough  to  produce  a  man's  daily  food,  a  day's  work  would 


636  PRINCIPLES   OF   POLITICAL   ECONOMY 

be  worth  the  product  of  five  minutes'  labor.  The  employer, 
having  control  of  the  entire  productive  process  simply  be- 
cause he  has  control  of  that  indispensable  factor,  capital, 
would  pay  a  wage  equivalent  to  five  minutes'  labor,  keeping 
for  himself  all  the  rest,  i.e.  the  value  produced  during  the 
other  nine  hours  and  fifty-five  minutes.1 

This  elaborate  display  of  dialectic,  designed  to  prove 
that  profit,  by  its  very  nature,  is  based  on  spoliation  and 
cannot  exist  otherwise,  is  founded  on  the  assumption  that 
the  value  of  manual  labor,  like  that  of  merchandise,  is 
determined  solely  by  the  cost  of  production.  But  if  we 
refuse  to  accept  this  fundamental  assumption  as  a  true  and 

1  Rodbertus  developed  a  theory  closely  resembling  that  of  Marx.  We 
quote  the  following  passages,  reminding  the  reader  that  Rodbertus  defines 
the  term  rent  (Rente)  as  "all  income  secured  without  personal  exertion 
solely  in  virtue  of  possession";  rent,  therefore,  means  all  income  except 
that  due  to  personal  labor. 

"  As  there  can  be  no  income  unless  it  is  produced  by  labor,  rent  rests  on 
two  indispensable  conditions.  First,  there  can  be  no  rent  if  labor  does  not 
produce  more  than  the  amount  just  necessary  to  enable  the  laborers  to  con- 
tinue their  labor ;  for  without  such  a  surplus  no  one,  unless  he  himself  labors, 
can  regularly  receive  an  income.  Secondly,  there  can  be  no  rent  if  arrange- 
ments do  not  exist  which  deprive  the  laborers  of  part  or  all  of  this  surplus 
arid  give  it  to  others  who  do  not  themselves  labor ;  for  in  the  nature  of  things 
the  laborers  themselves  are  always  the  first  to  come  into  possession  of  their 
product.  That  labor  yields  such  a  surplus,  is  due  to  economic  circumstances 
that  increase  the  productivity  of  labor.  That  this  surplus  is  entirely,  or  in 
part,  withdrawn  from  the  laborers  and  given  to  others,  rests  on  grounds  of 
positive  law ;  and  as  law  has  always  united  itself  with  force,  it  effects  this 
withdrawal  only  by  continual  compulsion. 

*'  This  compulsion  originally  took  the  form  of  slavery,  the  origin  of  which 
is  contemporaneous  with  that  of  agriculture  and  landed  property.  The 
laborers  who  created  this  surplus  were  slaves,  and  the  master  to  whom  the 
laborers  belonged,  and  to  whom  consequently  the  product  itself  also  belonged, 
gave  the  slaves  only  so  much  as  was  necessary  for  the  continuance  of  their 
labor,  keeping  the  remainder  or  surplus  for  himself.  When  all  the  land  has 
passed  into  private  property,  and  at  the  same  time  private  property  exists 
in  all  the  capital  of  a  country,  then  property  in  land  and  capital  exert  a  simi- 
lar compulsion  even  upon  freedmen  or  free  laborers.  Like  slavery,  this  state 
of  affairs  means,  first  of  all,  that  the  product  does  not-belong  to  the  laborers, 
but  to  the  masters  of  land  and  capital.  It  means,  in  the  second  place,  that 
laborers  who  possess  nothing,  —  while  the  masters  possess  land  and  capital, 


LEGITIMACY    OF   PROFITS  637 

complete  explanation  of  value,1  —  if,  as  many  economists 
maintain,  this  theory  is  inadequate  even  in  the  case  of  ordi- 
nary commodities  and  inapplicable  to  labor,  —  the  whole 
argumentative  structure  erected  upon  it  collapses. 

In  spite  of  this,  the  socialistic  argument  possesses  consider- 
able critical  value  as  a  scathing  and  partly  justifiable  arraign- 
ment of  the  present  social  organization  based  on  the  employer 
system  and  the  wage  system.  There  is  especially  a  large 
share  of  truth  in  the  contention  that  labor  has  been  treated 
as  a  commodity  to  be  bought  and  sold  like  any  other  com- 
modity. Employers  have,  as  a  matter  of  fact,  tried  to 
obtain  labor  as  cheaply  as  possible ;  and  during  many  cen- 
turies they  have  been  wonderfully  successful  in  this  endeavor. 
But  in  reply  to  these  charges  we  may  call  attention  to  those 
new  phenomena  that  were  pointed  out  when  we  discussed 
the  subject  of  wages  :  trades  unions,  labor  laws,  cooperation, 
and  the  whole  group  of  measures  tending  to  regulate  the 
rate  of  wages  by  other  laws  than  those  which  govern  the 
price  of  merchandise. 

Nevertheless,  while  insisting  that  profits  are  not  neces- 
sarily illegitimate,  nor  the  employer  necessarily  a  spoliator, 
we  may  raise  the  question  whether  the  office  or  "  social  func- 
tion "  of  the  entrepreneur  is  an  indispensable  and  permanent 
one,  as  most  economists  would  have  us  believe,  or  whether 
it  is,  on  the  other  hand,  merely  a  "historical  category,"  i.e. 
the  result  of  forces  and  exigencies  which  arise  in  the  course 
of  economic  evolution  and  may  sooner  or  later  disappear. 

—  are  glad  to  receive  a  part  only  of  the  product  of  their  own  labor,  in  order 
that  they  may  support  life  with  it,  i.e.  sustain  their  power  to  labor.  Thus, 
instead  of  the  commands  of  the  slave-owner,  we  have  a  contract  between 
laborer  and  employer  ;  but  this  contract  is  a  free  contract  only  in  name,  not 
in  reality,  and  hunger  makes  a  good  substitute  for  the  whip.  What  was 
formerly  called  food  is  now  called  wages." 

Rodbertus  regarded  the  income  of  the  capitalist,  entrepreneur,  and  land- 
lord, as  plunder  ;  or,  as  he  himself  said,  legalized  robbery  of  the  products  of 
others'  labor. 

1  See  pages  59  ff. 


638  PRINCIPLES   OF  POLITICAL  ECONOMY 

This  is  quite  a  different  question  from  that  regarding  the 
present  legitimacy  of  profits. 

We  have  seen  that  in  the  last  analysis  the  function  of  the 
entrepreneur  is  to  buy  productive  services  in  order  to  sell 
them  again  in  the  form  of  commodities ;  he  serves  as  an 
intermediary  between  laborers,  capitalists,  and  landowners, 
—  on  the  one  hand,  —  and  the  consumers  of  goods,  —  on  the 
other  hand.  But  the  role  of  intermediary,  or  go-between,  is 
not  of  such  paramount  social  importance  that  its  suppression 
is  inconceivable.  Indeed,  the  general  tendency  to-day  is  in 
favor  of  the  abolition  of  all  intermediaries.  We  have  called 
attention  to  this  tendency  with  regard  to  tradesmen  and 
storekeepers;  the  same  tendency  is  equally  perceptible  and 
desirable  with  regard  to  entrepreneurs. 1 
'  There  are  even  now  many  successful  stock  companies  and 
corporations  which  appear  to  get  along  without  the  entre- 
preneur or  employer.  This,  in  fact,  is  the  strongest  argu- 
ment used  by  collectivists  to  prove  that  the  employer  or 
entrepreneur  is  no  longer  a  necessary  productive  agent,  but 

1  This  would  not  be  true  if  profits  were,  as  Professor  J.  B.  Clark  main- 
tains, "  the  lure  to  invention  and  to  all  the  improvements  which  enlarge  the 
general  product  of  industry."  With  regard  to  Clark's  position  on  this 
point,  Mr.  J.  H.  Hobson  aptly  remarks  that  the  entrepreneur  "certainly 
has  the  habit  of  collecting  and  utilizing  inventions,  but  he  does  not  as 
entrepreneur  make  the  main  body  of  them,  neither  does  he  make  the  main 
body  of  other  industrial  improvements.  He  is  a  middleman  in  regard  to 
these  matters.  The  great  accessions  to  our  wealth  are  due  not  so  much  to 
monopoly  of  capital  and  labor  and  the  organization  of  it,  as  to  specific  appli- 
cations of  the  natural  sciences  to  methods  of  industry.  That  is  to  say,  the 
work  is  commonly  done  by  the  servants  of  the  entrepreneur,  who  get  a  very 
small  proportion  of  what  would  be  equal  to  the  actual  value  of  the  increased 
productivity  which  their  labor  creates.  A  great  many  inventions,  including 
the  greatest  inventions  of  all,  are  not  made  for  profit,  and  would  be  made  if 
no  profit  attached  to  them.  Those  which  do  require  some  incentive  of  profit 
do  not  require  the  enormous  profit  which  the  entrepreneur  is  often  able  to 
take  for  them."  ("Proceedings  of  the  American  Enconomic  Association," 
1902,  page  144.) 

The  function  of  the  inventor  is  of  great  social  importance  ;  but  it  cannot 
be  held  that  the  suppression  of  the  class  of  entrepreneurs  would  mean  the 
suppression  of  inventive  activity. 


ELIMINATING   THE   ENTREPRENEUR  639 

simply  a  social  parasite.  According  to  collectivists,  the  fact 
that  nowadays  the  most  important  business  concerns  are  not 
designated  by  the  names  of  the  individuals  at  their  head,  as 
formerly,  but  generally  constitute  joint-stock  companies  or 
corporations  having  no  personal  identity,  is  sufficient  evi- 
dence that  the  entrepreneur  no  longer  exists  —  if  we  use 
this  term  as  political  economists  use  it,  i.e.  to  designate  the 
person  who  is  both  the  owner  and  director  of  an  enterprise, 
and  who  receives  profits  in  payment  for  daily  work  of  a 
particular  kind.  The  individual  employer  has  been  done 
away  with ;  or,  rather,  his  place  is  taken  by  a  multitude  of 
idle  stock-holders.  If  we  do  away  with  these  stock-holders 
as  well,  the  enterprise  will  continue  precisely  as  before. 
Present  economic  evolution,  by  which  large-scale  production 
is  everywhere  being  substituted  for  small-scale  methods,  and 
by  which  impersonal  corporations  and  large  stock  companies 
are  taking  the  place  of  small  individual  enterprises,  will  soon 
reduce  all  employers  and  entrepreneurs  to  mere  stock-holders 
whose  sole  task  is  to  detach  coupons  and  collect  dividends. 
Whereupon,  according  to  the  collectivists,  their  uselessness 
being  patent  to  everybody,  their  social  function  will  be  at 
an  end. 

It  is  perfectly  evident  that  mere  stock-holders  —  the 
"  sleeping  partners  "  —  of  a  business  concern  do  not  play  a 
very  active  part  in  business  life.  For  this  reason  we  have 
said  repeatedly  that  the  rise  of  this  new  kind  of  property 
(called  shares  of  stock)  and  this  new  variety  of  income  (called 
dividends)  jeopardizes  the  existence  not  only  of  the  class 
of  employers  and  entrepreneurs,  but  also  the  institution  of 
private  property  itself.  It  may  indeed  be  said,  in  agreement 
with  most  economists,  that  these  corporations  extend  the 
ownership  of  capitalistic  enterprises  to  a  large  number  of 
persons  and  thus  introduce  a  democratic  element  into  mod- 
ern industrial  life ;  but  in  our  opinion  a  much  more  note- 
worthy characteristic  of  this  state  of  affairs  is  that  stock 
companies  constitute  an  easy  transitional  step  toward  collec- 
tivistic  expropriatino. 


640  PRINCIPLES   OF   POLITICAL   ECONOMY 

The  conclusions  drawn  by  collectivists  from  the  present 
tendency  toward  corporate  forms  of  enterprise  are,  how- 
ever, largely  illusory.  Two  points  in  particular  should  be 
noted  :  — 

(1)  All  stock  companies,  no  matter  how  impersonal  or  how 
large  they  may  now  be,  were  originally  founded  by  private 
individuals  with  a  view  to  reaping  profits;    nearly  all  of 
them,  moreover,  are  still  managed  and  controlled  financially, 
if  not  technically,  by  one  leading  shareholder  who  is  really 
an  employer  or  entrepreneur.1 

(2)  In  stock  companies  and  corporations,  moreover,  the 
absence  of  an  employer  or  entrepreneur  (in  the  strict  sense 
of  the  term)  is  really  the  cause  of  a  marked  inferiority,  and 
involves  disadvantages  resembling  those  that  are  noticeably 
inherent  in  public  administration.     The  hired  superintendent 
of  an  industrial  concern  owned  by  a  corporation  is,  indeed, 
like  a  government  official :  he  is  usually  not  so  zealous  as 
the  man  who  looks  after  his  own  private  affairs.     The  dis- 
advantages which  would  doubtless   soon   become   apparent 
under  collectivism,  if  ever  it  were  introduced,  are  as  follows : 
The  absence  of  individual  initiative  and  of  that  feeling  of 
personal  responsibility  which  prompts  men  to  do  their  very 
best ;  bureaucratic  methods  and  "  red  tape  " ;  the  waste  of 
time  and  energy,  of  labor  and  capital  —  a  memorable  exam- 
ple of  which  is  furnished  by  the  early  history  of  the  Panama 

1  We  do  not  deny  that  enterprises  established  a  long  while  ago,  and 
now  perfectly  organized  for  the  transaction  of  business  along  well-defined 
lines  —  such  as  insurance  companies  and  railroads  —  can  get  along  very 
well  without  entrepreneurs  or  employers.  Such  enterprises  are,  in  fact, 
entirely  fit  for  transfer  to  governmental  management.  We  maintain  simply 
that  the  time  is  still  far  distant  when  we  shall  be  able  to  dispense  with  the 
entrepreneur  as  a,  creator  of  new  enterprises.  In  all  dynamic,  progressive 
nations,  the  entrepreneur  will  continue  to  be  an  indispensable  power.  He 
will  be  unnecessary  only  when  human  societies  have  attained  a  static,  per- 
manent condition  —  which  is  not  an  altogether  impossible  state  of  affairs. 

Nor  do  we  maintain  that  it  is  possible  to  get  along  without  shareholders, 
that  is  to  say,  without  the  help  of  the  savings  of  persons  not  directly  con- 
cerned in  the  management  of  an  enterprise. 


EXAGGERATION   OF   PROFITS  641 

Canal.  We  by  no  means  share  M.  de  Molinari's  opinion 
that  stock  companies  are  the  ideal  future  form  of  productive 
enterprise.  (See  page  160.) 

Although  economic  evolution  seems  to  point  to  the  ulti- 
mate elimination  of  the  class  of  employers  and  entrepreneurs, 
as  well  as  the  abolition  of  the  wage  system  (of  which  em- 
ployers and  entrepreneurs  are  an  essential  part),  the  time 
does  not  yet  seem  ripe  for  accomplishing  this  step.  We 
shall  presently  find  sufficient  proof  for  this  in  the  difficulties 
which  cooperative  societies  for  production,  the  purpose  of 
which  is  precisely  to  do  away  with  the  employer,  experience 
in  organizing  and  carrying  on  their  work. 

It  should  be  noted,  in  conclusion,  that  there  is  a  general 
tendency  to  exaggerate  the  rate  of  profits.  The  circumstance 
that  the  profits  of  an  enterprise  all  go  to  one  man  or  to  a  few 
men,  while  the  wages  are  distributed  among  hundreds  or 
thousands  of  sharers,  leads  to  false  ideas  regarding  the  mag- 
nitude of  profits  as  compared  with  wages.  If  all  employers 
and  entrepreneurs  were  done  away  with,  and  their  profits 
divided  among  all  the  laborers,  the  latter  would  be  surprised 
to  discover  how  small  an  increase  of  their  incomes  would  be 
the  result  of  this  expropriation.1 


1  Mr.  S.  H.  Adams,  in  an  article  in  Scribner's  Magazine  for  January, 
1897,  quotes  the  manager  of  a  large  department  store  to  the  effect  that  the 
profits  of  these  stores  are  represented  by  the  cash  discounts  on  their  bills. 
As  it  is  well  known  that  5  per  cent  is  a  high  average  discount,  we  have  here 
an  index  as  to  yearly  profits.  There  was  a  time  when  10  per  cent  profit  was 
regarded  as  nothing  extraordinary.  Now  it  is  considered  decidedly  advan- 
tageous. The  Twenty-first  Annual  Report  of  the  Massachusetts  Bureau  of 
Labor  Statistics,  based  on  returns  from  over  10,000  establishments  in  that 
state,  declared  that  7.61  per  cent  of  these  establishments  did  not  make  any 
net  profit.  The  result  for  all  industries  indicated  a  net  profit  amounting  to 
3.90  per  cent  of  the  selling  price,  and  equivalent  to  4.83  per  cent  on  the 
capital  invested. 

It  should  be  added,  however,  that  this  report,  like  all  statistics  of  profits, 
has  been  severely  criticised.  All  figures  on  this  subject  must  be  suspiciously 
viewed.  Indeed,  it  is  extremely  doubtful  whether  trustworthy  data  are 
obtainable.  The  term  "profits'1  is  so  variously  understood  as  to  preclude 


642  PRINCIPLES    OF    POLITICAL   ECONOMY 


IV.   Profit-sharing 

In  our  discussion  of  the  wage  system  as  a  method  of  re- 
muneration, we  pointed  out  that  one  of  its  principal  disad- 
vantages was  the  conflict  to  which  it  inevitably  gave  rise 
between  employer  and  laborers.  This  is  due  largely  or 
entirely  to  the  fact  that  —  other  things  being  equal  —  the 
higher  wages  are,  the  lower  profits  will  be,  and  vice  versa.1 
This  is  what  Ricardo  meant  when  he  declared  that  "  every 
diminution  in  the  wages  of  labor  raises  profits,"  whereas  "  a 
rise  of  wages  invariably  lowers  profits."  Constant  strikes 
furnish  ample  evidence  of  this  antagonism  of  interests. 
Under  the  existing  economic  organization  of  society,  em- 
ployers and  workmen  constitute  two  separate  groups,  facing 
each  other  in  an  attitude  of  mutual  opposition,  yet  each 
unable  to  get  along  without  the  other ;  they  are,  almost  in 
spite  of  themselves,  bound  together  by  ties  of  interdepen- 
dence. 

Another  undesirable  result  of  the  wage  system,  of  which 

statistical  uniformity,  even  if  entrepreneurs  were  able  and  disposed  to  tell  the 
precise  truth. 

The  precariousness  of  profits,  moreover,  must  be  taken  into  account,  inas- 
much as  one  bad  year  may  wipe  out  the  accumulations  of  several  good 
business  years. 

According  to  Leroy-Beaulieu,  "experience  proves  that  of  every  ten  indus- 
trial or  commercial  entrepreneurs,  two  or  three  become  bankrupt  or  are 
obliged  to  quit  business  ;  five  or  six  make  just  enough  to  live  comfortably  on 
the  modest  remuneration  which  they  receive,  but  are  unable  to  put  aside 
much,  if  anything  at  all ;  and  only  one,  or  two  at  the  outside,  really  succeed 
in  building  up  a  fortune  of  any  size." 

In  1902  the  number  of  commercial  failures  in  the  United  States  (i.e.  ex- 
cluding bank  failures)  reached  9,639.  Since  1876,  in  fact,  the  number  of 
annual  failures  has  rarely  fallen  below  10,000,  and  has  twice  exceeded  15,000. 

1  We  emphasize  the  condition  "other  things  being  equal."  For  it  is 
evident  that  if  productivity  changes,  and  the  total  output  of  an  enterprise  is, 
let  us  say,  doubled,  it  is  possible  for  both  wages  and  profits  to  be  doubled 
simultaneously.  It  frequently  happens  that  in  new  countries,  where  produc- 
tivity is  greatest,  wages  and  profits  are  both  high. 

In  a  paper  read  before  the  American  Economic  Association  in  1902,  Pro- 


PROFIT-SHAKING  643 

mention  has  already  been  made,  is  the  nature  of  the  wage 
contract,  by  which  the  laborer  is  confined  to  a  purely  passive 
part  and  has  no  direct  interest  in  the  success  or  failure  of 
the  enterprise  with  which  he  is  connected.  Workmen  can- 
not be  dissuaded  from  the  idea  that  they  have  some  claim  to 
the  wealth  that  issues  from  their  hands.  Nor  can  they  be 
prevented  from  contemplating  with  bitterness  the  fact  that 
successive  generations  of  employers  or  stock-holders  grow 
rich  from  the  proceeds  of  factories  or  mines  in  which  they  — 
the  laborers — have  worked  faithfully  from  generation  to  gen- 
eration without  ever  rising  above  a  condition  of  apparently 
unchangeable  poverty.  It  is  true,  perhaps,  that  they  have 
been  mere  manual  laborers,  simple  "  hands  "  in  the  employ  of 
their  masters.  But  the  great  misfortune  of  our  social  organ- 
ization consists  in  just  this  fact  that  men  may  be  regarded  as 
mere  instruments  for  other  men.1 

Profit-sharing  is  that  method  of  remunerating  labor  which 
aims  to  do  away  with  the  above  disadvantages  of  the  wage 
system  by  making  the  wage-earner  a  kind  of  partner  with  the 

fessor  J.  B.  Clark  suggested  the  possibility  of  "  labor  organizations  and  trusts 
cooperating  in  such  a  way  that  the  two  consolidations  together  could  impose 
on  the  public  a  monopolistic  tax  which  neither  could  impose  if  it  acted  by 
itself.  Workmen  and  employers  are  antagonists  in  one  part  of  the  distribu- 
tive process,  and  allies  in  another  part.  They  may  fight  the  employers 
fiercely  enough  when  the  issue  at  stake  is  how  much  of  what  is  extorted 
from  the  public  shall  be  made  over  to  labor ;  but  in  making  the  extortion  the 
interests  of  employer  and  employed  are  in  harmony." 

High  wages  do  not  necessarily  mean  low  profits.  It  is  quite  probable  that 
the  employer  will  find  it  profitable  to  hire  better-paid  laborers  or  to  increase 
the  wages  of  those  already  in  his  employ,  if  only  the  increase  of  wages  coin- 
cides with  a  sufficient  increase  of  productivity  to  result  in  greater  net  profits. 
What  the  entrepreneur  cares  about  is  not  the  gross  expenditure,  but  the  total 
net  profits.  High-priced  labor  is  not  necessarily  the  dearest  labor.  (See 
page  494. ) 

1  Kant's  first  moral  precept,  called  the  "supreme  practical  principle,"  is 
as  follows  :  "  Remember  at  all  times  that  we  must  regard  the  person  of  our 
neighbor  as  an  end  in  itself,  not  as  a  means."  It  is  evident  that  the  present 
social  organization,  under  which  laborers  in  the  employ  of  an  entrepreneur 
are  a  means  for  his  enrichment,  is  a  violation  of  this  elevated  maxim. 


644  PRINCIPLES   OF   POLITICAL   ECONOMY 

employer.  Profits,  instead  of  .'falling  exclusively  to  the 
latter,  are  divided,  according  to  some  system  of  sharing, 
between  employer  and  employees,  the  workmen  thus  receiv- 
ing an  addition  to  their  regular  wages  if  the  enterprise  has 
been  successful. 

This  arrangement  has  existed  among  fishermen  from  time 
immemorial.  It  may  also  be  said  that  the  "  metayer  "  sys- 
tem in  agriculture  is  simply  a  kind  of  profit-sharing.  But 
the  first  experiment  of  this  kind  to  achieve  a  noteworthy 
success  was  that  made  in  1842  by  Leclaire,  a  Parisian  house- 
painter.  Leclaire  came  to  the  conclusion  that  there  are  in 
the  common  workman  moral  qualities  to  which  the  simple 
wage  system  makes  slight  appeal  because  it  leaves  the  inspir- 
ing word  "  profit,"  with  all  its  implications  of  ambition,  zeal, 
and  persistence,  out  of  the  workman's  vocabulary.  He  be- 
lieved that  the  energy  called  forth  by  the  prospect  of  profits 
would  (by  increasing  the  quantity  of  the  product,  by  improv- 
ing its  quality,  by  promoting  care  of  implements  and  ma- 
chinery, and  economy  of  materials,  and  by  diminishing  labor 
difficulties  and  the  cost  of  superintendence)  create  a  return 
beyond  the  average,  a  return  not  only  sufficient  to  pay  a 
bonus  to  the  workman,  but  also  to  increase  the  profits  of  the 
employer. 

There  are  now  probably  over  a  hundred  establishments  in 
France  which  apply  the  system  of  profit-sharing.  The  most 
interesting  of  them  is  the  largest  department  store  in  Paris, 
the  Bon  Marche,  employing  over  three  thousand  persons  and 
doing  a  business  of  $30,000,000  a  year.  The  results  of  the 
system  have  generally  been  less  satisfactory  in  England  and 
the  United  States,  although  many  experiments  along  this 
line  have  been  tried  in  both  countries.1 


1  For  a  more  detailed  discussion  of  the  nature  and  history  of  profit-sharing, 
the  student  may  refer  to  the  following  books  :  N.  P.  Gilman,  "  Profit-sharing 
between  Employer  and  Employee"  ;  Sedley  Taylor,  "  Profit-sharing  between 
Capital  and  Labor"  ;  the  article  on  Profit-sharing  in  Bliss's  "  Encyclopaedia 
of  Social  Reform." 


PROFIT-SHARING  645 

The  fundamental  idea  of  profit-sharing  is  susceptible  of 
the  most  varied  application,  but  the  name  is  usually  confined 
to  those  cases  in  which  it  is  not  simply  a  spontaneous  gift  on 
the  part  of  the  employer,  but  a  contractual  arrangement. 
In  other  words,  profit-sharing  must  be  set  down  as  a  part  of 
the  rules  governing  a  business  enterprise ;  it  must  be  granted 
to  employees  as  a  right,  without  distinction  of  persons,  and 
subject  only  to  conditions  prescribed  in  advance.  It  usually 
provides  that  the  distributed  profits  shall  be  shared  among 
the  employees  in  proportion  to  their  respective  wages  and 
with  some  regard  for  the  length  of  their  service. 

The  shares  given  to  the  laborers  may  either  be  paid  to 
them  in  money  or  placed  to  their  credit  in  a  savings-bank 
or  insurance  association.  In  France,  where  profit-sharing 
appears  to  be  most  successful,  the  latter  method  prevails; 
the  laborer's  share  of  the  profits  is  generally  paid  into  a  fund 
for  providing  insurance  against  sickness,  disability,  or  death. 
This  method  has  the  merit  of  assuring  the  good  use  of  the 
workman's  supplementary  remuneration  ;  but  by  postponing 
to  some  distant  time  the  actual  enjoyment  of  these  advan- 
tages, it  diminishes  the  good  results  that  are  usually  attrib- 
uted to  profit-sharing. 

The  objects  of  profit-sharing,  numerous  from  both  the 
moral  and  economic  point  of  view,  are  as  follows  :  — 

(1)  To  reconcile  labor  and  capital,  and  to  increase  the 
laborer's  dignity  by  transforming  him  from  a  mere  productive 
instrument  into  a  partner. 

(2)  To  increase  the  productivity  of  labor  by  stimulating 
the  workman's   activity,  furnishing  him   an   incentive   for 
faithful  work,  and  leading  him    to  feel  a  direct,  personal 
interest   in   the   success   of   the   enterprise   in  which   he  is 
employed. 

(3)  To  increase   the   laborer's   income  by  adding  to  his 
ordinary  wages  (which  continue  to  be  devoted  to  his  running 
expenses)  an  annual  dividend  that  can  be  saved  or  used  to 
meet  extraordinary  expenses. 


646  PRINCIPLES   OF   POLITICAL   ECONOMY 

(4)  To  avoid  loss  of  employment  by  attaching  the  laborer 
more  closely  and  more  permanently  to  the  enterprise  in 
which  he  is  employed. 

It  must  be  admitted,  however,  that  the  great  hopes  aroused 
by  this  system  have  not  been  realized.  The  number  of  firms 
which  practise  profit-sharing  tends  in  most  countries  rather 
to  diminish  than  to  increase.  It  has,  moreover,  met  with 
little  encouragement  or  approval  either  from  socialists  or 
from  conservative  economists. 

On  the  part  of  socialists,  this  is  readily  comprehensible. 
Socialists  regard  profits  as  a  robbery,  committed  by  employ- 
ers to  the  disadvantage  of  laborers.  A  supposed  reform, 
they  declare,  which  consists  in  righting  such  robbery  by 
giving  back  a  share  of  the  booty  to  the  victim,  is  the  height 
of  impertinence  ! 

Conservative  economists,  without  expressly  condemning 
profit-sharing,  hesitate  to  acknowledge  its  utility.  Professor 
Leroy-Beaulieu  ironically  calls  it  a  device  for  making  the 
wage  system  more  "palatable,"  and  declares  that  laborers 
really  have  no  right  to  a  share  in  the  profits,  inasmuch  as 
profits  are  due  to  no  merit  or  exertion  of  theirs,  but  are  ex- 
clusively the  result  of  the  entrepreneur's  management  and 
circumspection. 

This  argument  is  valid  if  we  hold  that  profits  are  the  wages 
of  invention  and  superintendence ;  for  the  laborers  take  no 
part  in  either  of  these  activities,  and  are  therefore  not 
entitled  to  share  in  their  results.  But  if  we  maintain  that 
profits,  strictly  speaking,  are  generally  the  result  of  a  mo- 
nopoly-element of  some  sort  (see  page  625),  it  is  only  just 
that  the  laborers  should  participate  in  the  advantages  due 
to  a  monopoly  which  is  useless  without  their  help.  Note 
especially  that  share-holding  capitalists  are  supposed  to  be 
fully  entitled  to  a  proportionate  part  of  the  proceeds  of  an 
enterprise,  although  there  can  be  no  doubt  that  the  profits 
resulting  from  a  monopoly-element  are  due  much  less  to 
their  work  than  to  that  of  the  employees. 


OBJECTIONS   TO   PROFIT-SHARING  647 

Another  serious  objection  which  has  been  raised  is  that  if 
the  laborers  share  the  profits,  they  should  also  share  the  losses; 
but  as  the  latter  is  impracticable,  the  former  is  unjustifiable. 
This  argument,  however,  is  not  conclusive.  It  goes  without 
saying  that  if  there  are  losses,  the  laborers  will  receive  no 
profits.  But  is  it  equitable  to  go  further  than  this,  and 
reduce  wages  by  the  amount  of  the  losses  ?  When  the  man- 
agers of  an  enterprise  discover  at  the  end  of  a  business  year 
that  there  has  been  a  loss  instead  of  a  profit,  is  the  interest 
due  the  capitalist  for  borrowed  money  reduced  for  this  rea- 
son ?  By  no  means  !  Now  the  workman  has  just  as  much 
right  to  the  stipulated  wages  as  the  capitalist  has  to  the 
stipulated  interest ;  for  the  laborer  also  has  furnished  one  of 
the  requisites  of  production.  As  a  matter  of  fact,  however, 
if  the  business  does  not  prosper,  the  workman's  wages  will 
probably  be  reduced,  while  the  capitalist  will  continue  to 
receive  the  same  interest.  The  objection  may  still  be  raised 
that  when  an  enterprise  fails,  the  capitalist  loses  his  capital, 
whereas  the  laborer  does  not.  This  is  true  simply  because 
the  laborer  has  no  capital  to  lose.  But  he  does  lose  his  place 
and  the  means  of  earning  a  living ;  and  certainly  this  loss  is 
quite  as  great  as  that  experienced  by  the  capitalist.  Capital- 
ists and  laborers  have  their  own  distinct  risks,  and  there  is 
no  reason  for  confounding  them.1 

The  institution  of  profit-sharing  is  not  gaining  much 
ground,  because  it  is  subject  to  the  disfavor  which  now 
attaches  to  all  forms  of  the  wage  system,  to  paternalism, 

1  The  arguments  of  conservative,  "liberal"  economists  against  profit- 
sharing  are  stated  with  considerable  detail  by  Leroy-Beaulieu  in  his  Econ- 
omic Politique,  Vol.  II.  Kefer  also  to  Hadley's  "  Economics,"  pages  373  ff. 

A  summary  of  the  case  against  profit-sharing,  evidently  from  the  stand- 
point of  a  more  radical  economist,  may  be  found  in  Bliss's,  "  Encyclopaedia  of 
Social  Reform."  Here  the  argument  is  presented  that  profit-sharing  is  unjust 
because  it  reduces  the  proportionate  share  of  the  laborers  by  leading  them  to 
create,  by  their  greater  activity,  not  only  a  bonus  for  themselves  but  also 
additional  profit  for  the  employer.  It  says,  *'  If  yo?e,  the  worker,  will  work 
a  little  harder,  we,  the  management,  will  give  you  a  slight  share  of  your  in- 
creased earnings." 


648  PRINCIPLES    OF    POLITICAL    ECONOMY 

to  the  industrial  sovereignty  of  the  employer,  and,  in  fact,  to 
every  device  which  tends  to  strengthen  the  bonds  between 
employer  and  employee.  Labor  and  capital  are  each  in  quest 
of  greater  independence  of  the  other.  The  prerequisite  of 
profit-sharing,  however,  is  a  spirit  of  fellowship  and  friendly 
collaboration  —  the  spirit  that  is  every  day  becoming  rarer. 
Laborers  as  a  rule  prefer  such  a  system  as  "  job  contracts," 
to  which  we  have  already  referred. 

Thus  profit-sharing  is  a  modification,  an  improvement,  of 
the  wage  contract ;  it  is  not  the  complete  and  perfect  associa- 
tion of  capital  and  labor,  the  laborers  having  neither  any 
responsibility  for  the  losses  incurred,  rior  any  share  in  the 
management.  Profit-sharing  may  be  transformed  into  the 
association  or  quasi-partnership  of  labor  and  capital,  by  con- 
verting the  share  allotted  to  the  laborer  into  part-ownership 
of  the  enterprise  ;  in  other  words,  by  making  the  laborer  a 
stock-holder.1  This  more  radical  variety  of  profit-sharing, 
which  has  been  tried  in  a  number  of  establishments,  is  some- 
times called  industrial  co-partnership,  or  labor  co-partnership. 

V.    Productive  Cooperation 

A  still  more  radical  scheme  is  that  which  contemplates  the 
abdication  and  gradual  disappearance  of  the  employer,  by 
transferring  all  the  stock  of  an  enterprise  to  the  laborers 
themselves.  Thus  profit-sharing  is  transformed  into  produc- 
tive cooperation.  Industrial  co-partnership  may  be  regarded 
as  the  transition-stage  between  the  two  systems.  The  Le- 
claire  establishment  (to  which  we  have  referred),  and  the 
celebrated  "  Familistery  "  at  Guise,  founded  by  Godin,  have 
gradually  been  transformed  into  societies  for  productive 

1  This  transformation  of  the  laborer  into  a  stock-holder  may  be  either 
elective  or  obligatory  •  in  the  latter  case  the  laborer's  share  in  the  profits 
becomes  ipso  facto  a  share  of  the  stock.  The  latter  method  appears  some- 
what autocratic  ;  but,  unfortunately,  experience  shows  that  it  is  the  sole  effec- 
tual method  of  accomplishing  the  aim  in  view.  The  Familistery  at  Guise  (in 
France)  was  built  up  by  this  method. 


PRODUCTIVE  COOPERATION  649 

cooperation.  But  societies  for  productive  cooperation  may 
also  be  formed  spontaneously  by  groups  of  workmen  them- 
selves, without  passing  through  these  transitional  stages. 

France  is  regarded  as  the  classic  land  of  institutions  of  this 
nature,  and  seems  to  have  taken  the  first  steps  toward  produc- 
tive cooperation.  The  first  cooperative  society  for  production 
was  founded  in  1834  by  Buchez,  a  French  publicist.  At  the 
close  of  the  Revolution  of  1848,  the  movement  in  favor  of 
productive  cooperation  assumed  great  vigor,  and  more  than 
two  hundred  labor  societies  for  production  were  founded  in 
France,  particularly  in  Paris.  But  only  four  of  them  have 
survived.  There  was,  however,  a  temporary  recrudescence 
of  the  movement  in  1866,  and  in  recent  years  the  number  of 
these  organizations  has  increased  with  considerable  rapidity.1 

In  the  United  States,  the  first  productive  cooperative  asso- 
ciation of  which  we  have  any  record  was  the  Boston  Tailors' 
Associative  Union,  which  was  formed  in  1849,  but  did  not 
last  long.  The  best  known  American  cooperative  enter- 
prises of  a  productive  character  are  those  among  the  coopers 
of  Minneapolis.  As  early  as  1868  the  experiment  of  renting 
a  small  shop  and  selling  the  product  directly  to  the  mills  was 
tried  by  a  few  journeymen  coopers  ;  they  allowed  themselves 
the  ordinary  rate  of  wages,  calculated  on  the  piece  system, 
and  then  divided  the  profits  in  proportion  to  the  work 
done.  Successful  instances  of  productive  cooperation  may 
be  found  among  boot  and  shoe  companies.  Cooperative 
creameries  and  dairies  have  also  had  considerable  develop- 
ment in  the  United  States.2 

The  obstacles  encountered  by  productive  cooperative  socie- 
ties are  numerous,  and  account  only  too  well  for  their  want 

1  In  1902  there  were  in  France  323  cooperative  societies  for  production, 
some  of  which  were  very  prosperous. 

The  Report  of  the  Thirty-fourth  Annual  Cooperative  Congress  (1902) 
recorded  136  "productive  societies"  in  Great  Britain;  in  addition,  there 
were  thirty  cooperative  societies  for  farming. 

2  Consult  Professor  F.  Parsons's  article  in  the  Arena  for  August,  1903. 


650  PRINCIPLES    OF   POLITICAL   ECONOMY 

of  success  and  for   their  comparatively  short   duration   in 
many  cases. 

(1)  The  first  and  greatest  obstacle  consists  in  the  lack  of 
economic  education  among  the  working  classes.     Laborers  are 
rarely  able  to  find  among  their  own  numbers  men  capable  of 
managing  a  business  enterprise.     Again,  assuming  that  such 
men  can  be  found,  the  laborers  do   not  know  enough  to 
choose  them  and  keep  them  as  managers ;  the  very  superiority 
of  such  men  frequently  leads  to  their  exclusion.     Further- 
more, even  supposing   that  such  men  are  chosen   as   man- 
agers, the  rank  and  file  of  laborers  are  rarely  willing  to  give 
the  managers  a  share  of  the  proceeds  proportionate  to  the 
value  of  their  services,  the  superiority  of  intellectual  over 
manual  labor  not  being  sufficiently  understood. 

(2)  The   second   drawback  is  the  want  of  capital.     We 
know  very  well  that  although  it  may  be  possible  to  eliminate 
the  capitalist  from  productive  enterprises,  it  is,  at  ail  events, 
impossible  to  get   along  without   capital ;    and   large-scale 
production  demands  capital  in  larger  and  larger  amounts. 
(See  page  135.)     How  can  mere  laborers  obtain  the  amount 
of  capital  requisite  for  successful  production  ?     By  putting 
aside  a  few  cents  day  by  day  ?     This,  to  be  sure,  is  possible, 
and  it  has  been  done  in  the  case  of  a  few  businesses  con- 
ducted after  the  methods  of  small-scale  industry  ;  but  it  is 
accomplished  only  at  the  cost  of  heroic  sacrifices,  and  is  alto- 
gether exceptional.     Ought  the  government  to  lend  them  the 
requisite  funds  ?    This  experiment  was  tried  in  France  in  1848, 
but  the  $400,000  distributed  for  this  purpose  among  various 
productive  societies  brought  little  success  to  these  organiza- 
tions.    Nothing  is  easier  than  to  waste  money  that  is  freely 
received,  especially  when  the  government  is  the  donor.1 

1  The  socialists  maintain  that  all  successful  enterprises  must  be  equipped 
with  the  best  appliances,  —  machinery,  etc.,  —  and  that  these  appliances  cost 
large  sums  of  money.  The  workers,  however,  do  not  possess  sufficient  money, 
and  for  this  reason  they  cannot  carry  on  their  own  productive  enterprises. 
All  that  is  needed,  therefore,  in  order  that  they  shall  prosper,  independently 


REACTIONARY   EFFECTS   OF   COOPERATION  651 

We  do  not,  however,  regard  this  difficulty  as  insur- 
mountable. Carefully  organized  and  firmly  established 
workmen's  productive  associations,  when  once  they  have 
given  proof  of  their  economic  vitality,  would  easily  be  able 
to  borrow  all  the  capital  they  might  require.  They  could 
do  this  either  through  the  agency  of  cooperative  banks  (such 
as  are  already  in  existence  in  Germany,  Italy,  and  France)  or 
by  seeking  help  from  other  cooperative  organizations  (such 
as  distributive  cooperative  societies)  having  considerable  cap- 
ital at  their  disposal.  (See  pages  396  and  677.) 

(3)  The  third  danger,  finally,  is  that  they  tend  to  re- 
establish the  very  institutions  which  they  seek  to  eliminate, 
namely,  the  class  of  employers  and  the  wage  system.  This 
shows  how  difficult  it  is  to  modify  the  organization  of 
society.  Too  often,  when  cooperative  associations  have 
proved  successful,  they  close  their  ranks,  refuse  to  accept 
new  members,  and  engage  hired  workmen  (i.e.  wage-earners), 
—  thus  becoming  nothing  more  than  stock  companies  or  part- 
nerships made  up  of  small  employers.1  This  is  the  principal 
objection  that  socialists  raise  against  productive  cooperation, 
and  we  must  admit  that  it  is  well  founded.  On  the  other 
hand,  would  it  not  require  exceptional  disinterestedness  on 

of  capitalist  and  entrepreneur,  is  the  requisite  capital.  Ferdinand  Lassalle 
proposed  that  the  government  should  meet  this  difficulty  by  advancing  several 
millions  of  capital  to  associations  of  workmen  who  would  guarantee  to  make 
good  its  value  at  the  close  of  the  period  of  production.  Lassalle  believed 
that  productive  associations  thus  aided  by  the  state  could  drive  private  busi- 
nesses out  of  the  field  and  gradually  lead  to  a  reorganization  of  society  on  a 
collectivistic  basis. 

1  The  Cooperative  Barrel  Company  of  Minneapolis,  for  example,  regarded 
as  a  noteworthy  example  of  cooperative  production,  had  a  number  of  em- 
ployees working  for  wages. 

The  same  was  true  of  the  Rochdale  Pioneers,  in  England.  Even  now  some 
productive  works  of  the  English  Cooperative  Wholesale  Society  are  carried  on 
by  hired  laborers  that  have  no  share  in  either  profits  or  management. 

One  of  the  Parisian  cooperative  societies  for  production  (that  of  the  spectacle- 
makers)  has  fifty  members  and  twelve  hundred  employees  working  for  wages, 
and  the  value  of  a  share  of  its  stock  has  increased  from  §60  to  $10,000. 
Clearly,  such  a  society  is  cooperative  only  in  name. 


652  PRINCIPLES   OF   POLITICAL   ECONOMY 

the  part  of  those  workmen  who  have  succeeded  by  dint  of 
privations  and  perseverance  in  founding  a  prosperous  bus- 
iness, if  we  should  expect  them  to  admit  on  a  footing  of 
equality  all  those  who  wish  to  enter  at  the  eleventh  hour, 
when  the  difficult  task  of  organization  has  already  been 
accomplished  ? 

Yet  there  is  reason  to  hope  that  these  obstacles  in  the  way 
of  productive  cooperation  may  be  avoided  by  first  traversing 
a  stage  of  preparation ;  this  preparation  could  be  provided  in 
these  ways :  — 

(1)  By  profit-sharing.     Sometimes  the  employer  will  con- 
sent to  withdraw  gradually  from  the  leadership  of  an  enter- 
prise by  enabling  the  laborers  to  become  partners  during  his 
lifetime,  and  his  successors  after  his  death.     The  most  cele- 
brated examples  of  this  method  are  furnished  by  M.  Godin 
in  the  Familistery  at  Guise,  and  by  Madame  Boucicaut  in  the 
case  of  the  Bon  MarchS,  a  Parisian  department  store. 

(2)  By  trades  unions.      Several  productive  associations 
in  France  owe  their  origin  to  trades  unions.      Again,  the 
Sovereigns  of  Industry  and  the  Knights  of  Labor,  two  organ- 
izations of   workingmen   in   the   United    States,  founded  a 
number  of  enterprises  for  cooperative  production.      When 
trades  unions  take  this  step,  they  do  not  set  to  work  all  the 
members  of  the  organization  simultaneously,  —  having  nei- 
ther capital  nor  markets  sufficient  to  do  this,  —  but  only 
those  members  of  the  union  who  happen  from  time  to  time 
to  want  employment. 

(3)  By  consumers'   cooperative  societies.      When  these 
societies  are  sufficiently  developed,  and  united  into  larger 
federations,  they  can  undertake  cooperative  production,  and 
furnish  this  new  departure  with  the  three  requisites  of  suc- 
cess :  capital,  which  they  are  able  to  lend ;  experienced  men 
suitable  for  managers;  and  regular  customers,  consisting  of 
the  consumers'  societies  themselves.     These  three  elements, 
be  it  noted,  are  precisely  those  which  have  hitherto  been 
wanting.     Some  consumers'  cooperative  societies  in  England, 


FEDERALISM   AND   INDIVIDUALISM  653 

where  a  number  of  prosperous  productive  societies  have 
already  been  established,  pursue  this  policy. 

It  is  by  the  last-named  method  that  productive  coopera- 
tion may  achieve  greater  successes  in  the  future.  In  this 
connection  it  is  important  to  note  the  difference  between 
the  federalist™  and  the  individualistic  systems  —  as  they  are 
designated  in  England. 

Under  the  federalistic  system,  consumers'  cooperative  so- 
cieties, either  separately  (when  they  are  strong  enough)  or  in 
groups,  establish  workshops  or  factories  for  producing,  on 
their  own  account,  some  of  the  articles  they  require.  In  this 
case  the  laborers  in  their  employ  are  simply  wage-earners, 
and  in  no  wise  co-proprietors  of  the  concern;  usually,  more- 
over, they  have  no  share  in  the  p'rofits,  these  being  reserved 
exclusively  for  the  members.1  There  has  been  much  oppo- 
sition to  this  system,  on  the  ground  that  the  laborers  should 
have  a  share  both  in  the  profits  and  in  the  ownership  of  the 
workshop  or  factory.  This  step  has  already  been  taken  in 
the  case  of  the  Scottish  Wholesale  Society. 

Under'  the  individualistic  system,  which  had  better  be 
called  the  autonomous  system,  the  first  steps  are  taken  by 
the  laborers  themselves,  who  form  independent  productive 
societies ;  the  consumers'  societies  only  lend  them  the  capital, 
provide  a  market,  and  protect  them  from  competition.2 

As  the  conclusion  of  this  chapter,  and  of  the  whole  book 
on  Distribution,  we  venture  to  assert  that  there  is  a  paral- 
lelism between  the  political  and  the  economic  evolution  of 

1  It  goes  without  saying  that  if  these  employees  are  members  of  the  con- 
sumers' society  which  employs  them,  they  participate,  as  such,  in  the  profits 
of  the  factory  or  shop. 

2  In  England  these  independent  productive  societies  numbered  about  one 
hundred  in  1901,  with  a  capital  of  over  §7,000,000  and  an  output  valued  at 
nearly  $15,000,000. 

The  productive  enterprises  founded  directly  by  the  consumers'  societies, 
either  separately  or  through  wholesale  societies,  produced  $36,000,000  worth 
of  goods,  or  more  than  twice  as  much  as  the  preceding  societies.  (Consult 
the  Book  on  Consumption  for  a  further  treatment  of  consumers'  societies.) 


654  PRINCIPLES   OF   POLITICAL  ECONOMY 

society.  Political  evolution  embraces  the  three  successive 
stages  of  absolute  monarchy,  constitutional  monarchy,  and 
republic.  There  are  many  sound  reasons  for  believing  that 
economic  evolution  follows  step  by  step  along  correspond- 
ing lines,  and  includes,  first,  the  stage  of  coercive  organi- 
zation (slavery) ;  second,  the  rule  of  the  employer  (the 
wage  system) ;  third,  the  rule  of  the  employer  modified  by 
profit-sharing  and  certain  concessions  to  the  laborers  with 
regard  both  to  the  ownership  and  management  of  business 
enterprises ;  and,  finally,  cooperative  production.  There  are, 
however,  equally  good  reasons  for  believing  that  the  advent 
of  democracy  in  the  domain  of  economic  life  will  be  slower 
and  more  difficult,  and  will  involve  even  more  disappoint- 
ments, than  in  the  political  sphere.1 

1  John  Stuart  Mill  regarded  independent  productive  cooperation  as  the 
means  of  solving  the  social  problem. 

Despite  Lassalle's  advocacy  of  it,  collectivists  are  now  openly  opposed  to 
productive  cooperation.  Productive  societies,  although  they  aim  to  abolish 
the  wage  system,  retain  the  individual  ownership  of  capital  as  the  basis  of 
their  organization,  inasmuch  as  they  expressly  endeavor  to  make  the  work- 
men co-proprietors  of  the  instruments  of  production.  Collectivism,  on  the 
contrary,  aims  to  "socialize"  the  instruments  of  production,  i.e.  to  with- 
draw them  from  individual  ownership  even  by  the  laborers  themselves.  This 
antagonism  was  clearly  shown  in  the  recent  strike  at  Carmaux,  in  France, 
when  the  proposal  was  made  to  start  a  glass-works  belonging  to  the  glass- 
workers  themselves.  The  socialists  protested  that  the  works  should  belong 
to  the  entire  laboring  class  ;  and  their  plan  was  ultimately  adopted. 

Liberal  economists  regard  productive  cooperation  with  the  same  ironical 
attitude  of  condescension  as  profit-sharing  and  cooperation  in  general.  As 
they  do  not  admit  either  the  desirability  or  the  possibility  of  abolishing  the 
wage  system,  they  cannot  admit  the  possibility  of  getting  along  without  a 
class  of  employers. 


BOOK  V.     CONSUMPTION 

I.    The  Nature  and  Laws  of  Consumption 

To  consume  wealth  is  to  utilize  it  for  the  satisfaction  of 
our  wants,  to  apply  it  to  the  uses  and  purposes  for  which  it 
was  produced.  Consumption  is,  therefore,  the  ultimate  aim 
of  all  economic  activity,  —  of  production,  exchange,  and  dis- 
tribution. Its  importance  is  far  greater  than  is  indicated  by 
the  meagre  space  devoted  to  it  in  most  treatises  on  political 
economy.  It  is,  moreover,  a  field  of  investigation  rich  in 
curious  facts,  but  very  largely  unexplored.  A  greater 
knowledge  of  this  field  is  likely  some  day  to  transform 
economic  science.  Logically,  economics  should  begin  with 
the  study  of  consumption.  Did  we  not  begin  this  volume 
with  a  study  of  wants  and  utility,  —  matters  which  clearly 
belong  to  the  domain  of  consumption  ? 

The  tendency  of  modern  economic  theory,  especially  of 
investigations  concerning  the  subjective  nature  of  value,  has 
been  in  the  direction  of  giving  added  importance  to  con- 
sumption as  a  necessary  part  of  the  edifice  of  economic 
science.  The  so-called  Austrian  school  studies  consumption 
and  value  from  the  standpoint  of  final  utility  (see  pages  59 
and  182)  and  emphasizes  the  principle  that  in  the  consump- 
tion of  wealth  the  maximum  of  gratification  is  reached  when 
the  final  utilities  of  the  last  increments  consumed  are  equal. 
Everybody  consciously  or  unconsciously  employs  his  income 
and  makes  his  purchases  according  to  this  law.  It  is  a  law 
so  important  that  we  shall  devote  some  space  to  a  more 
detailed  explanation  of  it. 

As  we  have  already  said,  the  purpose  of  economic  activity 
is  human  welfare,  human  gratification ;  or,  to  be  more  strictly 

655 


656  PRINCIPLES   OF  POLITICAL  ECONOMY 

accurate,  its  ultimate  purpose  is  either  to  produce  positive 
pleasure  or  to  avoid  pain.  Men  seek  to  minimize  pain  and 
to  maximize  pleasure.  But  these  two  aims  —  to  minimize 
pain  and  to  maximize  pleasure  —  are  in  a  sense  antagonistic. 
More  wealth  means  more  pleasure,  and  if  there  were  no 
effort  or  pain  involved  in  the  acquisition  of  wealth,  our  con- 
sumption of  it  would  be  limited  only  by  satiety.1  But  in 
the  example  of  the  man  drawing  water  from  a  well  (see 
pages  55  and  82)  we  saw  that  whereas  the  utility  of  each 
successive  bucket  decreases,  the  effort  or  pain  necessary  to 
obtain  it  increases  because  of  growing  fatigue.  Most  of  the 
commodities  that  we  consume  are,  to  be  sure,  not  the  direct 
product  of  our  own  labor,  but  are  procured  by  the  use  of 
money.  Therefore  it  seems  strange  to  speak  of  the  pain  or 
effort  necessary  to  produce  them.  Yet  this  expression  is 
perfectly  correct,  viewed  in  its  deeper  significance.  For,  in 
the  first  place,  it  is  by  labor  that  we  get  the  money;  and 
when  we  exchange  this  money  for  goods  we  are  really 
exchanging  our  labor  and  effort  (see  page  212)  for  the 
labor  and  effort  of  others;  and,  in  the  second  place,  when- 
ever we  spend  money  for  one  commodity  in  preference  to 
another  we  are  really  sacrificing  that  other  commodity,  which 
we  might  have  purchased.  If  under  given  circumstances  we 
buy  oranges  rather  than  peaches,  we  do  this  because  oranges 
afford  a  greater  gratification  than  we  can  obtain  from 
peaches. 

Concrete  examples  will  make  this  matter  clearer.  And  in 
order  that  the  factors  of  the  problem  of  consumption  may  be 
clearly  distinguished  from  each  other,  let  us  begin  with  the 
simplest  possible  example  and  subsequently  introduce  the 
elements  that  further  complicate  the  problem. 

1  It  is,  perhaps,  necessary  to  point  out  that  the  term  "  pain,"  as  we  have 
used  it  and  as  it  is  coming  to  be  used  very  generally  among  economists, 
merely  means  the  opposite  of  pleasure.  There  are  objections  to  its  use  in 
this  sense,  because  of  its  association  with  disease  or  other  abnormal  physical 
conditions.  The  term  simply  means  disutility. 


DECREASING   UTILITIES 


657 


Take  the  consumption  of  water,  of  which  there  is  an 
abundant  supply.  Let  us  suppose  that  it  costs  absolutely 
nothing.  What,  in  such  a  case,  would  be  the  limit  to  our 
consumption  of  it?  Clearly  we  should  consume  just  as 
much  as  afforded  us  any  gratification  whatever.1  A  certain 
amount  would  be  indispensable.  Still  more  would,  up  to  a 
certain  point,  be  highly  agreeable.  Additional  quantities 
would  decrease  rapidly  in  utility,  down  to  the  point  where 
we  should  have  absolutely  no  use  for  more  water.  If,  now, 
the  acquisition  or  employment  of  each  portion  involves  some 
effort,  —  say  the  time  and  effort  of  turning  a  spigot  and  carry- 
ing the  water  away,  —  we  will  cease  consuming  water  at  pre- 
cisely the  point  where  the  utility  is  still  somewhat  greater 
than  the  effort,  but  beyond  which  it  would  not  be  "  worth 
our  while  "  to  get  more  of  it.  This  condition  of  affairs  may 
be  represented  by  the  following  diagram  :  — 


ABCDEFQR        JT, 

The  line  AX  represents  the  amount  of  the  commodity; 
that  is  to  say,  in  this  case,  the  supply  of  water.  The  lines 

1  This  statement  requires  some  qualification.  The  limit  to  consumption  is 
fixed  not  only  by  the  point  of  satiety,  and,  as  we  shall  point  out  later,  by  the 
actual  "  cost "  of  the  commodity,  but  also  by  the  time  at  our  disposal  if  we 
intend  to  consume  any  other  goods,  and  by  the  fact  that  the  continued  con- 
sumption of  this  commodity  may  be  incompatible  in  kind  with  other  pleasures 
from  different  sources.  A  man  will  cease  consuming  water  before  further 
increments  possess  no  utility,  if  it  is  his  intention  to  consume  other  goods 
that  provide  a  greater  utility-surplus  than  additional  increments  of  water.  To 
consume  more  water  will  decrease  a  man's  capacity  for  consuming  other 
goods  and  will  always  take  a  certain  amount  of  vhis  time  (which  is  one  of  his 
valuable  possessions). 


658  PRINCIPLES   OF   POLITICAL   ECONOMY 

A  1,  B  2,  (73,  etc.,  represent  the  utility  of  successive  portions 
used.  The  consumer  in  this  illustration  will  use  eight  units 
because  the  utility  of  the  eighth  unit  is  still  a  positive 
quantity. 

As  a  matter  of  fact,  we  consume  as  much  water  as  we 
think  we  have  any  use  for.  But  water  is  an  exceptional 
commodity  as  regards  supply.  Most  commodities  are  not 
obtainable  in  sufficient  quantity  to  satisfy  entirely  the  wants 
of  all  mankind.  Take,  for  example,  suits  of  clothes.  Would 
not  any  of  us  willingly  accept  more  suits  of  clothes  if  he 
might  obtain  as  many  as  he  could  use?  Why,  then,  do  we 
not  possess  more?  Because  they  cost  money.  And,  as  our 
supply  of  money  is  limited,  we  cannot  obtain  additional  suits 
without  spending  money  that  might  be  used  for  the  purchase 
of  some  other  commodity  of  which  our  present  supply  is  also 
insufficient  to  satisfy  our  wants  entirely.  We  are  certainly 
willing  to  pay  a  large  sum  of  money  to  obtain  at  least  one 
suit ;  for  this  is  absolutely  necessary.  We  probably  will 
not  hesitate  to  pay  the  price  for  a  second  suit.  The  money 
that  we  must  sacrifice  to  obtain  it  would,  to  be  sure,  buy 
something  else  which  we  may  desire  keenly ;  yet  our  desire 
to  be  well  clothed  outweighs  our  longing  to  possess  the 
object  that  we  might  otherwise  purchase  with  the  cost  of 
the  second  suit.  There  are,  as  a  matter  of  fact,  persons 
who  buy  not  merely  one  or  two  suits,  but  half  a  dozen, 
before  they  feel  that  a  greater  gratification  may  be  procured 
by  employing  their  money  in  some  other  way  than  in  buying 
an  additional  suit.  This  fact  may  be  represented  in  the  form 
of  a  diagram  (see  page  659),  as  follows :  — 

Here  AX,  as  before,  represents  the  supply  of  the  com- 
modity in  question,  and  the  lines  -4.1,  -B2,  etc.,  indicate 
the  utility  of  each  successive  suit  of  clothes  for  a  given 
consumer.  MN  is  the  cost  line,  and  the  part  of  each  line 
Al,  .#2,  etc.,  which  falls  below  JOT  indicates  the  cost  of 
each  suit.  If  suits  cost  absolutely  nothing,  this  consumer 
would  find  satisfactory  employment  for  nine  of  them ;  but 


WHAT  DETERMINES  CONSUMPTION? 


659 


in  view  of  the  fact  that  they  cost  the  amount  represented 
by  AM,  he  will  purchase  only  five.     The  cost  of  the  sixth 


[f 


suit  is  greater  than  the  utility  of  the  money  which  would 
have  to  be  paid  for  it.  The  point  of  marginal  utility  comes 
after  the  fifth  suit,  but  before  the  sixth.1 

In  the  world  of  actual  business  we  have  a  choice  among 
almost  innumerable  uses  of  our  money,  and  we  are  con- 
stantly called  upon  to  make  some  decision  with  regard  to 
the  relative  utilities  of  a  multitude  of  commodities.  The 
problem,  then,  is :  How  much  of  each  commodity  shall  we 
consume?  This  depends  partly  on  our  desire  for  them, 
that  is  to  say,  on  the  utility  or  gratification  which  their 
possession  involves;  and  partly  on  the  cost  (effort,  pain, 
or  sacrifice)  necessary  under  given  conditions  to  obtain 
them. 

The  principles  which  govern  our  choice  of  the  kinds  of 
goods  and  the  amounts  thereof  that  we  shall  consume  may  be 
made  clear  by  the  following  example :  Take  four  commodi- 
ties that  are  offered  for  sale  on  the  market.  Let  us  desig- 
nate them  as  A,  J9,  (7,  and  D.  The  first  increment  of  A 
yields  ten  units  of  gratification ;  that  of  B,  eight  units ;  that 

1  If  instead  of  a  series  of  vertical  lines  of  decreasing  length  we  indicate 
the  decline  of  utility  by  a  curved  line  running  downward,  the  point  of  mar- 
ginal utility  will  be  the  intersection  of  this  curve  wtyh  the  cost  line.  It  is  of 
course  possible  that  the  cost  may  not  remain  the  same,  as  assumed  in  the 
diagram  given  above.  In  agriculture  the  line  of  costs  would  be  a  rising 
curve,  not  a  straight  line  ;  in  manufactures  it  would,  for  a  while  at  least, 
be  a  falling  curve.  Consult  Marshall's  "Principles  of  Economics,"  Vol.  I, 
pp.  441  ff. 


660  PRINCIPLES   OF   POLITICAL   ECONOMY 

of  (7,  six;  and  that  of  Z>,  three.  Successive  increments  of 
each  commodity  will  of  course  afford  less  gratification.  The 
successive  increments  of  A,  including  the  first,  will  probably 
represent  a  decreasing  scale,  — 10,  9,  8,  7,  etc.,  units  of 
utility.  The  successive  increments  of  B  represent  utilities 
of  8,  7,  6,  etc.  The  increments  of  commodity  0  represent 
utilities  of  6,  5,  4,  etc.,  units.  The  increments  of  Z>,  finally, 
possess  utilities  of  3,  2,  1,  0.  This  scale  of  diminishing 
utilities  may  be  arranged  in  this  form :  — 

A  B  Q  D 

10 
9 

8        8 
7        7 
666 
555 
444 
3333 
2222 
1111 
0000 

If  we  assume,  for  convenience,  that  there  are  only  these 
four  commodities  from  which  to  choose,  it  is  obvious  that 
two  increments  of  A  will  be  desired  before  there  willbe  any 
thought  of  applying  our  purchasing  power  to  the  acquisition 
of  any  of  the  other  commodities.  When  four  increments  of 
A  have  been  consumed,  and  two  of  B,  there  will  be  room  for 
hesitation  with  regard  to  the  advisability  of  beginning  to  con- 
sume some  of  O.  If  each  increment  represents  what  can  be 
secured  by  one  hour's  labor,  and  if  A  stands  for  food,  B  for 
clothing,  C  for  shelter,  and  D  for  ornament,  the  scale  would 
express  the  following  facts :  That  two  hours'  labor  would  be 
devoted  to  the  production  (or  securing  possession)  of  food 
before  any  other  commodity  could  be  considered;  that  the 
third  hour  would  produce  an  equal  utility  whether  devoted 


PRINCIPLES   OF   CONSUMPTION  661 

to  clothing  or  food,  so  that  half  of  it  would  probably  be 
given  to  each;  that  only  after  six  hours'  labor,  of  which  four 
had  been  given  to  food  and  two  to  clothing,  could  sufficient 
pleasure  be  derived  from  shelter  to  furnish  an  induce- 
ment to  devote  a  portion  of  the  time  to  the  task  of  secur- 
ing shelter.  The  corresponding  numbers  in  the  different 
columns  represent  different  utilities,  equal  in  amount  and 
equally  difficult  of  acquisition.  If  each  separate  desire  could 
be  completely  satisfied,  it  would  be  found  that  ten  incre- 
ments of  A,  eight  of  B,  six  of  <7,  and  three  of  D  had  been 
consumed.1 

From  this  discussion  two  fundamental  principles  may  be 
deduced  concerning  the  order  and  quantities  in  which  goods 
will  be  consumed:  (1)  We  will  first  procure  and  consume 
those  goods  which  yield  the  greatest  surplus  of  utility  over 
costs.  (2)  We  will  endeavor  to  reach  a  maximum  of  grati- 
fication by  making  the  final  utilities  of  the  last  increments  of 
all  commodities  as  nearly  equal  as  possible.  If  a  man  drinks 
ten  glasses  of  beer  and  smokes  ten  cigars  a  day,  this  means 
that  the  gratification  afforded  by  the  tenth  glass  of  beer  is 
subjectively  equal  to  that  of  the  tenth  cigar.  For  if  the 
tenth  cigar  did  not  afford  a  pleasure  equal  to  the  last  glass 
of  beer,  he  would  evidently  prefer  smoking  one  cigar  less 
and  drinking  one  more  glass  of  beer ;  for  thus  the  total 
gratification  would  be  increased.2 

Before  leaving  this  aspect  of  the  problem  of  consumption 
we  must  point  out  that  although  in  the  management  of  our 
expenses,  and  particularly  in  large-scale  transactions,  we  con- 
stantly make  careful  estimates  of  the  comparative  utility  and 
the  comparative  cost  of  commodities,  yet  seldom  can  judg- 
ments be  made  with  the  exactness  that  the  above  discussion 

1  A  considerable  part  of  this  last  illustration  is  taken  from  Dr.  Devine's 
little  book  on  Economics  (Macmillan,  1898). 

2  A  further  discussion  of  the  principles  of  consumption  in  their  economic 
bearing  will  be  found  in :  Patten,  "  The  Consumption  of  Wealth  "  (Philadel- 
phia, 1889);  E.  T.  Devine,  "Economics"  (New  York,  1898). 


662 


PRINCIPLES    OF    POLITICAL   ECONOMY 


appears  to  take  for  granted.  Some  authorities  (despite  Pro- 
fessor Jevons'  able  defence  of  the  use  of  mathematics  in  his 
"  Theory  of  Political  Economy  ")  deny  that  it  is  possible  to 
express  such  subjective  matters  as  desire  and  utility  in  quan- 
titative terms.  It  is  objected  moreover  that  men  are  not  so 
much  creatures  of  reason  as  creatures  of  habit  or  impulse 
(both  of  which  oftentimes  prompt  irrational  conduct). 
Wants  are  often  aroused  by  advertisements,  show-windows, 
and  circumstances  of  an  accidental  nature.  There  are, 
furthermore,  cases  in  which  the  utility  of  additional  units 
of  a  commodity  is  not  necessarily  less  than  that  of  the  first 
increment  —  cases  which  are  indicated  by  the  proverb : 
"  Appetite  comes  by  eating;" 

Yet  it  must  also  be  pointed  out  that  there  is  a  striking 
uniformity  in  the  habits  of  consumption  of  large  classes  of 
people.  An  investigation  made  by  the  United  States  Com- 
missioner of  Labor  (Report  for  1891)  gave  the  following 
results  concerning  the  percentage  of  expenditure  for  "nor- 
mal "  families :  — 


OBJECT  OF 
EXPENDITURE 

Income 
under  $200 

Income 
$300  and 
under  $400 

Income 
$500  and 
under  $600 

Income 
$700  and 
under  $800 

Income 
$900  and 
under  $1000 

Income 
$1200  and 
over 

Per  Cent 

Per  Cent 

Per  Cent 

Per  Cent 

Per  Cent 

Per  Cent 

Food  .    .    . 

49.64 

45.59 

43.84 

38.89 

34.34 

28.63 

Kent  .    .     . 

15.48 

14.98 

15.15 

15.60 

14.96 

12.59 

Clothing     . 
Fuel  .     .     . 

12.82 
7.07 

14.14 
6.04 

15.27 
5.63 

16.33 
4.42 

16.84 
4.00 

15.71 

2.57 

Lighting     . 
All      other 

1.01 

.98 

.97 

.88 

.74 

.45 

purposes  . 

13.98 

18.27 

19.14 

23.88 

29.12 

40.05 

It  is  evident  that  the  scientific  value  of  such  tables  as 
these  depends  largely  on  the  number  of  cases  studied  and 
the  accuracy  of  the  data  employed.  Careful  investigations 
of  this  sort,  however,  have  been  made  by  Le  Play  (1855), 
Ducpetiaux  (1851),  and  Dr.  Engel  (1857),  and  subsequently 


THE   MEANING   OF   CONSUMPTION  663 

by  a  number  of  other  investigators.  The  general  results 
seem  in  the  main  to  agree  with  the  inferences  drawn  by  Dr. 
Engel,  viz.  :  — 

(1)  As  the  income  of  a  family  increases,  a  smaller  per- 
centage is  expended  for  food. 

(2)  As  the  income  of  a  family  increases,  the  expenditure 
for  clothing  remains  approximately  the  same. 

(3)  In  all  the  cases  investigated,  the  percentage  of  expen- 
diture for  rent,  fuel,  and  light,  was  nearly  the  same. 

(4)  As  the  income  increases,  a  constantly  growing  per- 
centage is  expended  for  education,  health,  recreation,  amuse- 
ments, etc.1 

The  word  "  consumption  "  may  give  rise  to  errors  which  we 
must  be  careful  to  avoid.  In  the  first  place,  it  must  not  be 
supposed  that  all  consumption  necessarily  implies  destruction. 
This  is  indeed  true  in  the  case  of  some  things  ;  such  wants  as 
food  and  warmth  can  be  satisfied  only  by  the  destruction  of 
food  and  fuel.  To  utilize  bread,  i.e.  to  change  it  into  flesh 
and  blood,  we  must  eat  it ;  to  warm  ourselves  with  coal  we 
are  obliged  to  burn  it,  i.e.  to  reduce  it  to  smoke  and  ashes.2 

1  Mr.  G.  B.  Waldron,  in  "A  Handbook  on  Currency  and  Wealth"  (New 
York,  1896),  page  100,  gives  the  following  estimates  for  the  consumption  of 
wealth  in  the  United  States  in  1890  :   Necessaries,  $6,100,000,000,  of  which 
$3,305,000,000  was  for  food,   $1,233,000,000  for  clothing,  $319,000,000  for 
furniture,  $475,000,000  for  fuel  and  lighting,  and  $768,000,000  for  other  nec- 
essaries.    For  luxuries  the  total  expenditure  was  $3,584,000,000,  of  which 
$900,000,000  was  for  liquors,  $450,000,000  for  tobacco,  and  $2,234,000,000 
for  other  luxuries.     Tor  capitalistic  uses,  $3,717,000,000;  'of  which  $2,- 
436,000,000  was  to  renew  old  capital,   $1,196,000,000  to  increase  the  sup- 
ply of  capital,  and  $85,000,000  sent  out  of  the  country  in  payment  for  the 
use  of  foreign  capital.     In  addition  to  these  items,  the  permanent  govern- 
ment expenses, — aside  from  salaries  and  other  payments,  which  figure  as 
consumed  by  other  persons,  —were  $240,000,000.     Probably  no  two  authori- 
ties would  agree  on  the  amount  which  is  annually  withdrawn  from  con- 
sumption in  order  to  maintain  capital,  and  to  make  good  the  wastes  of  time 
and  use. 

2  Economically,  combustion  is  tantamount  to  destruction,  but  it  is  of 
course  impossible  to  destroy  matter  itself.     Just  as  man  in   production   is 
powerless  really  to  create  anything  (see  page  73),  he  is  also  unable  really  to 


661  PRINCIPLES   OF   POLITICAL   ECONOMY 

But  there  are  fortunately  many  other  wants  the  satisfac- 
tion of  which  does  not  involve  the  destruction  of  wealth. 
The  statue  of  the  Venus  of  Milo  will  provide  aesthetic  enjoy- 
ment for  all  generations  of  mankind  without  thereby  losing 
an  atom  of  its  substance ;  its  power  to  provide  pleasure  may 
be  destroyed  by  vandals,  never  by  "consumers."  Undoubt- 
edly time  itself  is  a  destroyer  of  nearly  all  things  except 
coins,  bronze  objects,  and  statues  ;  and  even  these  do  not 
entirely  escape  "the  tooth  of  time."  Tempus  edax  rerum. 
But  we  must  take  care  not  to  confound  the  effects  of  time 
with  those  of  consumption.  As  a  matter  of  fact,  we  strive 
to  make  things  last  as  long  as  possible.  If  we  could  make  all 
things  indestructible  (clothes,  houses,  furniture,  etc.),  they 
would  not  be  worse,  but  better,  adapted  to  economic  pur- 
poses ;  for  in  such  an  event  they  could  be  utilized  perpetu- 
ally, and  we  should  have  attained  the  ideal  of  consumption. 

On  the  other  hand,  we  must  not  confound  consumption 
with  production.  It  is  true  that  the  production  of  wealth  in- 
volves the  constant  consumption  of  raw  material,  coal,  etc.  ; 
economists  generally  designate  this  consumption  as  repro- 
ductive consumption,  to  distinguish  it  from  the  consumption 
which  serves  for  the  direct  satisfaction  of  our  wants,  and 
which  is  called  unproductive  consumption.  But  only  the 
latter  is  consumption  proper,  and  the  name  should  be  con- 
fined to  it.  The  act  of  sowing  seed,  for  example,  must  not 
be  regarded  as  an  act  of  consumption,  but  as  the  type  of  pro- 
ductive activity  ;  to  designate  it  as  consumption,  and  to 
apply  the  same  term  to  two  acts  so  opposite  as  sowing  wheat 

destroy  anything.     The  chemist  finds  that  not  an  atom  of  the  "  consumed  " 
object  has  been  lost. 

Even  -when  consumption  results  in  the  destruction  of  utility,  it  is  often 
possible  by  means  of  economical  methods  and  devices  to  make  use  of  the  res- 
idues of  consumption.  Paper  is  made  of  old  rags,  slag  and  swill  are  used 
to  make  fertilizer,  coal  dust  is  employed  in  the  manufacture  of  dyes  and 
perfumes.  The  possibility  of  using  residual  substances,  even  in  small  quan- 
tities, is  one  of  the  reasons  for  the  superiority  of  large  productive  plants. 
In  an  absolutely  perfect  economy,  no  utility  would  be  lost,  and  the  consump- 
tion of  wealth  would  be  simply  its  metamorphosis. 


KINDS   OF   CONSUMPTION  665 

and  eating  it,  can  be  explained  only  by  the  paucity  and 
inaccuracy  of  economic  terminology. 

Without  doubt,  the  economic  process  forms  a  complete  cir- 
cuit. Man  produces  in  order  to  consume,  and  he  must  con- 
sume in  order  to  produce.  This  is  so  true  that  some 
economists  have  actually  regarded  sowing  as  an  act  of  con- 
sumption, while  others  (such  as  Jevons)  regard  eating  as  an 
act  of  production,  because  they  consider  the  food  of  the 
workman  the  very  type  of  capital.  Yet  if  we  want  to 
reason  clearly  in  this  matter  we  must  draw  a  line  some- 
where. Man  is  both  the  beginning  and  the  end  of  all 
economic  processes.  But  man  does  not  consume  in  order  to 
produce  ;  he  produces  in  order  to  consume.  The  purpose 
of  wealth  is  to  be  consumed,  that  is,  to  satisfy  human  wants. 
Consumption  is  not  the  first  but  the  last  stage  of  the  eco- 
nomic process.1  At  all  previous  stages,  wealth  is  still  being 
produced. 

Consumption  is  of  two  kinds :  — 

First,  it  is  direct  or  immediate  —  when  it  satisfies  present 
wants.  As  under  present  economic  conditions  most  of  what 
we  consume  is  purchased  from  others,  this  kind  of  consump- 
tion is  effected  by  means  of  the  use  of  money  and  is  called 
spending. 

Secondly,  it  is  postponed  —  when  it  is  intended  to  provide 
for  the  satisfaction  of  future  wants.  Since  under  present 
conditions  value  is  stored  in  the  form  of  money,  this  opera- 
tion is  called  saving. 

We  shall  study  each  of  these  kinds  of  consumption  in  turn. 
But  before  doing  so,  we  must  say  a  word  about  another  cele- 
brated problem  due  to  the  unfortunate  circumstance  that  the 
gratification  of  the  most  important  human  want  —  the  need 
of  food  —  involves  the  destruction  of  wealth. 

1  "  A  fertilizer  is  useful  to  enrich  a  meadow  ;  the  meadow  is  useful  to  pro- 
duce hay  ;  hay  is  useful  to  feed  horses  ;  and  horses  are  useful  to  do  service. 
From  the  fertilizer  to  the  man  are  several  steps,  but  it  is  the  final  step  which 
makes  all  the  others  count." — GREGORY,  "Political  Economy." 


666  PRINCIPLES   OF   POLITICAL  ECONOMY 

II.  Whether  Production  will  always  keep  pace  with 
Consumption 

Malthus,  an  English  economist,  in  a  formula  that  has 
since  acquired  great  celebrity,  affirmed  that  the  population 
tends  to  increase  more  rapidly  than  the  means  of  subsistence.1 
Far  from  anticipating  that  production  would  keep  up  with 
consumption,  he  declared  that  production  would  always  lag 
behind  —  far  behind  —  the  demands  of  consumption.  He 
concluded  that  the  equilibrium  could  be  brought  about  only 
by  a  frequent  reduction  of  the  population,  effected  by  means 
of  wars,  epidemics,  famines,  pauperism,  prostitution,  and 
plagues,  all  of  which,  regarded  from  a  higher  point  of  view, 
Malthus  considers  really  providential.2 

Malthus,  however,  hoped  that  in  the  future  men  would 
learn  to  prevent  the  intervention  of  these  "immediate 
checks "  upon  population  and  make  them  unnecessary  by 

1  In  an  illustration  which  many  writers  have  erroneously  regarded  as 
intended  to  be  taken  literally,  Malthus  says  that  the  population  increases  in  a 
geometrical  progression,  while  the  food-supply  increases  in  an  arithmetical 
progression :  — 

Population  increases  thus :    1  :  2  : 4  :  8  : 16  :  32  :  64  : 128  :  256. 
Subsistence  increases  thus :   1:2:3:4:    5:    6:    7:      8:      9. 

The  average  period  in  which  the  population  could  be  doubled  Malthus 
estimated  as  twenty-five  years.  He  therefore  concluded  that :  "In  two  cen- 
turies the  population  would  be  to  the  means  of  subsistence  as  256  to  9 ;  in 
three  centuries  it  would  be  as  4096  to  13 ;  and  in  two  thousand  years  the 
difference  would  be  almost  incalculable." 

"  In  this  supposition  no  limits  whatever  are  placed  to  the  produce  of  the 
earth.  It  may  increase  forever  and  be  greater  than  any  assignable  quantity ; 
yet  still  the  power  of  population  being  in  every  period  so  much  superior,  the 
increase  of  the  human  species  can  only  be  kept  down  to  the  level  of  the 
means  of  subsistence  by  the  constant  operation  of  the  strong  law  of  necessity, 
acting  as  a  check  upon  the  greater  power." 

2  These  evils  are  providential,  according  to  Malthus,  not  only  because  they 
maintain  the  equilibrium  of  production  and  consumption  but  also  because 
they  exterminate  the  weak  and  the  incapable,  and  thus  contribute  to  perfect- 
ing the  human  race.     It  is  known  that  the  work  of  Malthus  prompted  Darwin 
to  undertake  his  investigation  of  the  evolution  of  species ;  Darwin  himself 
tells  us  so. 


MALTHUS    ON    POPULATION  667 

voluntarily  limiting  the  number  of  their  offspring.  To  ac- 
complish this  Malthus  advised  them  to  use  moral  restraint, 
i.e.  to  marry  only  when  they  possess  sufficient  resources  to 
support  children,  and,  once  married,  to  have  only  as  many 
children  as  they  can  properly  provide  for. 

A  century  has  elapsed  since  the  publication  of  this  remark- 
able doctrine,  and  experience  has  not  yet  justified  the  pessi- 
mistic prophecies  of  its  author.1  On  the  contrary,  in  almost 
all  countries,  whether  we  consider  new  nations  like  the 
United  States  or  old  nations  like  France,  wealth  has  in- 
creased more  rapidly  than  population.  To-day  our  princi- 
pal anxiety  is  of  quite  the  inverse  nature.  Markets  are 
now  so  encumbered  with  manufactured  and  agricultural  prod- 
ucts that  governments  have  been  obliged  to  raise  barriers 
of  customs  duties  against  the  influx  of  foreign  goods;  the 
problem  is  how  to  find  a  market  for  products,  rather  than 
how  to  produce  sufficient  goods  to  consume. 

The  enormous  and  growing  excess  of  production  over  con- 
sumption during  recent  years  may  of  course  be  due  to  causes 
that  will  not  recur,  —  such  as  the  cultivation  of  virgin  land 
in  new  countries,  and  the  great  cheapening  of  transportation 
by  the  use  of  steam.  It  is,  after  all,  perfectly  evident  that 
the  earth  cannot  provide  food  for  an  unlimited  number  of 
people;  the  law  of  diminishing  returns  will  sooner  or  later 
give  rise  to  a  serious  problem  of  population. 

No  speculation  concerning  the  economic  future  of  mankind 
can  ever  be  anything  more  than  what  Nitti  cleverly  calls 
a  sort  of  demographic  eschatology  without  scientific  value. 
Yet  the  following  considerations  are  perhaps  of  a  nature  to 
reassure  us  concerning  the  economic  destiny  of  our  race  :  — 

(1)  Statistics  prove  that  the  birth-rate  is  lower  among  the 
rich  than  among  the  poor,  and  that  the  birth-rate  tends  to 
decrease  with  the  growth  of  prosperity.  The  rise  of  a  multi- 
tude of  new  wants  probably  diminishes  the  intensity  of 
sexual  appetite,  which,  next  to  food,  is  the  principal  desire 
1  See  page  11,  note. 


668  PRINCIPLES   OF   POLITICAL   ECONOMY 

of  the  poorer  classes.  It  is  therefore  not  unlikely  that  the 
increase  of  wealth  among  all  classes  will  result  in  a  decrease 
in  the  birth-rate.  Indeed,  such  a  decrease  is  already  percep- 
tible in  almost  all  countries. 

(2)  Statistics  also  appear  to  show  that  the  birth-rate  is 
lower  in  democratic  communities  than  in  others.     Among  the 
native-born  population  of  the  United  States,  and,  strangely 
enough,  in  Australia  also,  the  birth-rate  has  fallen  as  low 
as  in  France.      Perhaps  the  cause  of  this   lies   in  the  fact 
that  in  such  communities  as  these  the  opportunities  for  social 
advancement  are  considerably  curtailed  whenever  a  person 
is  hampered  by  a  large  family.     Dumont  calls  this  fact  the 
law  of  capillarity.     It  influences  women  as  well  as  men.     The 
woman's   fights   movement,  which  is    simply  one  aspect  of 
modern  democratic  thought,  tends  to    diminish  the  impor- 
tance of  the  natural  function  of  women  as  wives  and  mothers, 
by  opening  up  new  pursuits  and  new  social  functions. 

(3)  Biology  teaches  that  in  general  the  fecundity  of   a 
species  is  inversely  proportionate  to  the  development  of  the 
individual,  the  inferior  animals  being    much   more   prolific 
than  the  superior  animals,  especially  man.     As  this  law  seems 
to  be  due  to  a  sort  of  physiological  antagonism  or  incompati- 
bility between  sexual  activity  and  cerebral  activity,  it  is 
reasonable  to  hope  that  the  fecundity  of  the  human  race  will 
diminish  in  proportion  to  the  intellectual  and  moral  develop- 
ment of  individuals,  especially  of  women.1 

(4)  The  physiological  laws  of  the  variety,  limitation,  and 
substitution  of  wants  (see  pages  40  fT.)  suggest  the  possi- 
bility of   satisfying   an   increasing   number  of   wants ;    for 
although  nature  provides  us  with  only  a  limited  quantity  of 
each  kind  of  wealth,  it  is  easy  to  conceive  of  an  unlimited 
number  of  new  wants  and  new  combinations  of  wants,  so  that 
the  possibilities  of  our  development  in  this  direction  are  lim- 
itless.    The  need  for  food,  for  example,  will  of  course  never 

1  Consult  "The  Evolution  of  Sex,"  by  Patrick  Geddes,  Chap.  XX,  and 
Nitti,  "Population." 


THE   FOOD    SUPPLY  669 

be  replaced  by  another  want,  but  the  need  for  a  particular 
kind  of  food  may  always  be  replaced  by  the  need  for  some 
other  kind  of  food.  If  men  had  to  live  on  wheat  alone,  there 
would  sooner  or  later  not  be  enough  of  it ;  but  as  they  are 
acquiring  the  habit  of  eating  less  of  it  and  consuming  in  its 
stead  an  increasing  variety  of  other  aliments,  and  as  new 
varieties  of  food  are  constantly  being  invented,  there  is  no 
reason  for  thinking  that  we  shall  ever  reach  the  limit  of  our 
food  supply. 


CHAPTER  I  — SPENDING 
I.  Whether  spending  helps  Business 

WE  hear  nothing  more  frequently  than  the  statement  that 
"  spending  promotes  business."  Hence  public  opinion  is  very 
indulgent,  even  sympathetic,  toward  all  expenditure,  even 
though  it  partakes  of  wastefulness.  A  man  may  break  all 
the  things  he  cares  to,  provided  he  pays  for  them.  Innumer- 
able moralists  and  dramatists  have  pitilessly  ridiculed  the 
miser,  while  making  almost  a  hero  of  the  spendthrift.  The 
man  who  saves  is  little  loved  by  his  neighbors,  and  incurs 
the  risk  of  being  regarded  as  a  public  enemy ;  whereas  the 
man  who  spends  his  money,  even  though  he  squanders  it  in 
riotous  living,  generally  enjoys  a  considerable  degree  of 
popularity.  One  may  admit  that  the  spendthrift  or  the 
drunkard  acts  foolishly  by  emptying  his  purse  or  ruining 
his  health;  in  which  case,  so  much  the  worse  for  him.  But 
at  all  events,  his  misfortune  is  the  advantage  of  others, — 
of  the  merchants,  laborers,  and  producers  who  receive  his 
money  and  profit  thereby. 

Certainly  money  that  is  spent,  i.e.  used  in  making  pur- 
chases, benefits  those  that  receive  it.  It  enables  them  to 
continue  and  expand  their  business.  But  Bastiat  long  ago 
pointed  out  that  this  money  would  have  been  expended 
anyway,  for  the  simple  reason  that  money  can  be  used  in 
no  other  way,  save  for  hoarding;  and  not  only  is  the 
amount  of  wealth  that  is  hoarded  comparatively  small,  but 
it  is  not  destined  to  be  hoarded  forever.  Spending  is 
simply  a  transfer  of  money,  the  removal  of  wealth  from 
one  branch  of  production  to  another ;  it  results  in  the  appli- 
cation of  labor  and  capital  to  other  branches  of  production. 

670 


FALLACIES   REGARDING  SPENDING  671 

It  must  not  be  supposed  that  spending  or  consumption  is  a 
matter  of  indifference  from  the  economic  point  of  view.  On 
the  contrary,  it  is  the  most  important  of  all  economic  opera- 
tions. Spending  is  beneficial  when  it  turns  capital  and  labor 
from  relatively  unproductive  channels  into  those  that  are 
more  productive ;  if  it  does  the  opposite,  it  is  economically 
harmful.  By  means  of  spending,  the  rich  man,  even  though 
he  lives  entirely  on  his  income,  exerts  a  great  influence  on 
productive  activity.  The  productive  factors,  —  land,  labor, 
and  capital, — are  in  his  control.  Like  the  centurion  in  the 
gospel,  when  he  says  to  one  "Come,"  he  comes,  and  to 
another  "  Go,"  he  goes.  This  commanding  power  is  precisely 
what  imposes  especial  responsibilities  and  unusual  duties. 

But  we  are  mistaken  when  we  believe  :  — 

(1)  That  because  only  spending  encourages  production, 
spending  is  more  useful  than  saving. 

We  shall  see  that  saving  also  leads  to  consumption,  —  to 
spending.  Money  that  is  saved  is  always  ultimately  spent 
for  some  purpose.  Onty,  instead  of  being  spent  by  its 
owner,  it  is,  perhaps,  spent  by  those  who  received  it  from 
him  as  borrowers,  as  laborers,  or  as  sellers  of  goods.  What 
does  it  matter,  from  the  standpoint  of  social  production, 
whether  money  be  spent  by  me  or  by  another  person  ? 

The  above  fallacy  is  due  to  the  fact  that  consumption  is 
the  purpose,  justification,  and  ultimate  goal  of  all  production. 
When  men  cease  to  consume,  they  will  also  cease  to  pro- 
duce; when  they  no  longer  need  bread  to  eat,  they  will  cease 
sowing  wheat.  But  to  argue  that  therefore  consumption  is 
the  efficient  cause  of  production,  or  that  consumption  neces- 
sarily means  production,  is  to  deduce  an  absurdity  from  an 
axiomatic  truth.  The  three  factors  of  production  are  already 
familiar  to  us, — land,  labor,  and  capital,  —  and  it  is  perfectly 
evident  that  consumption  cannot  create  or  increase  any  one 
of  them.  Nay,  consumption  constantly  tends  to  undo  the 
work  of  these  factors  and  to  decrease  the  supply  which  they 
store  up.  If  the  supply  of  accumulated  wealth  were  increased 


672  PRINCIPLES   OF   POLITICAL   ECONOMY 

by  a  constant  influx  of  commodities  so  that  the  more  we 
took  from  it  the  more  would  be  added,  the  error  which  con- 
sists in  believing  that  increased  consumption  means  increased 
production  might  be  pardonable.  But  such  is  not  the  case. 
No  one  would  dare  maintain  that  the  more  apples  we  pick, 
the  more  will  grow;  or  that  the  more  fish  we  catch,  the 
more  the  sea  will  provide ;  or  that  the  more  wood  we  burn, 
the  thicker  the  forest  will  grow. 

(2)  That  spending  is  always  an  advantage,  even  though 
it  involves  the  useless  destruction  of  wealth. 

This  popular  misconception  is  defended  by  the  assertion 
that  the  destruction  of  wealth,  although  it  may  necessitate 
replacing  the  wealth  that  was  destroyed,  furnishes  additional 
work  for  laborers  and  new  opportunities  for  capitalists.  Many 
people,  after  reading  of  a  fire,  console  themselves  with  the 
thought  that  it  will  furnish  builders  with  work.  Undoubtedly, 
the  money  that  is  spent  for  any  purpose  whatsoever  is  not  lost ; 
but  the  house  that  is  burnt  is  really  lost,  and  there  is  no 
gain  to  compensate  for  the  loss.  Builders,  to  be  sure,  may 
rejoice,  but  not  society  as  a  whole.  The  money  (or  the  capi- 
tal, labor,  and  material)  that  is  used  to  build  another  house 
would  have  been  used  anyway.  The  fire  has  necessitated 
doing  again  what  was  already  done  once.  There  has,  in 
fact,  been  an  expenditure  of  labor  and  material  sufficient  to 
build  two  houses.  Yet  because  of  the  fire  we  have  but  one  ; 
the  other  is  irretrievably  lost.1 

To  show  the  absurdity  of  this  argument,  moreover,  let  us 
carry  it  further.  If  it  be  based  on  sound  reasoning,  we  must 
regret  that  things  are  not  destroyed  ten  times  as  quickly 
and  easily  as  they  are  :  that  clothes  last  longer  than  a  week, 
that  houses  are  not  destroyed  every  ten  years  by  means  of 
earthquakes,  that  war  does  not  more  frequently  reduce  our 
national  wealth,  and  that  we  do  not  die  sooner,  —  since  the 
rapid  succession  of  human  generations  also  involves  a  great 
consumption  of  wealth! 

1  Consult  Bastiat's  celebrated  essay  on  "  La  Vitre  Cassee." 


THE  NATURE  OF  LUXURY  673 

II.   Luxury 

In  its  ordinary  use  the  word  "  luxury  "  means  the  gratifica- 
tion of  a  superfluous  pant.  This  definition  does  not  imply 
the  condemnation  of  luxury,  for,  as  Voltaire  said,  the  super- 
fluous is  exceedingly  necessary.  We  may  properly  wish  that 
everybody,  even  the  poorest  people,  might  have  a  little  of 
the  superfluous,  and  consequently  a  little  luxury.  Nature 
herself  furnishes  examples  of  magnificent  and  sometimes 
extravagant  luxury,  in  the  way  she  decorates  the  petals  of 
flowers,  the  wings  of  butterflies,  and  the  bodies  of  small 
insects.  Again,  history  teaches  us  that  every  new  want  was 
at  first  regarded  as  superfluous.  New  wants,  in  truth,  are 
superfluous  ;  because,  first,  no  one  has  previously  felt  them, 
and,  second,  because  to  satisfy  them  probably  means  con- 
siderable labor,  inasmuch  as  the  work  of  providing  for  them 
is  new  and  therefore  somewhat  difficult.  The  linen  we  wear, 
for  instance,  is  now  regarded  as  an  absolutely  indispensable 
part  of  our  apparel ;  to  say  that  a  man  is  reduced  to  his  last 
shirt,  is  a  proverbial  way  of  expressing  his  dire  poverty. 
There  have  been  epochs,  however,  when  a  shirt  was  regarded 
unquestionably  as  an  object  of  luxury,  and  fit  for  a  royal 
present.  The  same  may  be  said  of  thousands  of  other  objects. 
If,  therefore,  we  had  been  prevailed  upon  from  the  beginning 
to  accept  the  ascetic  doctrine,  and  suppressed  all  desire  for 
luxuries,  we  should  have  prevented  the  development  of 
all  those  wants  that  constitute  civilization,  and  we  should 
to-day  still  be  living  as  our  ancestors  lived  in  the  stone 
age.1 

Luxury  is  condenmable  only  when  it  degenerates  into 
wastefulness.  But  how  shall  we  recognize  wastefulness? 
This  is  an  interesting,  although  difficult,  question. 

1  Forks,  watches,  bicycles,  are  examples  of  such  objects  as  these,  originally 
regarded  as  luxuries.  As  for  forks,  it  is  by  no  means  certain  that  they  are 
preferable  to  the  chop-sticks  of  the  Chinese  and  Japanese,  which  are  better 
adapted  to  the  need  of  cleanliness  and  elegance,  and  cost  much  less. 


674  PRINCIPLES   OF   POLITICAL   ECONOMY 

In  answering  it,  public  opinion  generally  considers  only 
the  amount  spent.  But  the  economist  must  abandon  this 
point  of  view  entirely.  When  a  person  spends  thousands 
of  dollars  to  purchase  bric-a-brac,  or  when  he  pays  his  cook 
the  salary  of  a  general,  he  may  be  culpable  from  the  private 
point  of  view  of  his  own  family;  but  from  the  economic  stand- 
point of  society  as  a  whole,  the  money  spent  is  simply  trans- 
ferred from  his  pockets  to  those  of  the  persons  whose  goods 
or  services  he  buys. 

From  the  point  of  view  of  society,  the  sole  criterion  is  not 
the  amount  of  money  spent,  but  the  quantity  of  wealth  or  labor 
consumed  in  the  satisfaction  of  a  given  want.  It  must  always 
be  borne  in  mind  that  the  sum  total  of  existing  wealth  is 
insufficient  to  satisfy  even  the  elementary  wants  of  the 
greater  part  of  mankind,  and  that  the  productive  forces 
which  provide  and  increase  our  stock  of  wealth,  —  land, 
labor,  and  capital,  —  are  all  limited  in  quantity.  Whence  it 
is  evidently  an  unquestionable  duty  not  to  apply  to  the 
satisfaction  of  a  superfluous  want  too  large  a  share  of  our 
productive  forces  or  of  the  wealth  at  our  disposal.  All  this 
a  problem  of  proportion.  Unjustifiable  luxury  or  prodigality 
consists  in  a  disproportion  between  the  amount  of  social  labor 
consumed,  and  the  degree  of  individual  satisfaction  obtained. 
A  few  examples  will  make  this  clear. 

The  desire  for  flowers,  entirely  unknown  to  our  ancestors, 
is  certainly  a  luxury  in  the  proper  sense  of  the  word,  inas- 
much as  flowers  are  by  no  means  necessities  ;  yet  they  are  a 
charming,  elevating  luxury,  and  one  that  is  accessible  even 
to  the  poor.  But  when  we  decorate  our  drawing-rooms  with 
orchids  brought  from  distant  countries  at  an  expense  of 
thousands  of  dollars  and  perhaps  at  the  cost  of  human  life, 
or  with  blue  dahlias  raised  in  hot-houses  which  required 
more  coal  than  would  have  provided  warmth  for  ten  families 
during  the  winter,  this  kind  of  luxury  falls  under  the  second 
definition  that  we  have  given. 

For  a  lady  to  wear  a  dress  that  is  elegantly  made,  is  not 


JUSTIFIABLE  LUXURY  675 

necessarily  objectionable,  although  the  dress  may  have  cost 
several  hundred  dollars;  for  as  we  have  said,  we  are 
not  concerned  with  the  sum  spent  (that  simply  passes 
from  one  person  to  another)  but  with  the  amount  of 
material  or  labor  involved.  It  is  not  probable  that  this 
dress  required  more  cloth  or  much  more  labor  than  an  ordi- 
nary dress.  But  if,  on  the  other  hand,  a  lady  has  her  dress 
covered  with  several  yards  of  lace,  representing  many  years 
of  a  working-woman's  toil,  we  may  rightfully  raise  objec- 
tions on  both  moral  and  economic  grounds.1 

It  is  perhaps  justifiable  for  an  English  nobleman  to  spend 
several  millions  in  the  purchase  of  paintings  for  his  private 
gallery,  —  although  it  would  be  better  to  give  them  to  a  public 
museum.  But  when,  like  the  rough  barons  of  the  Middle 
Ages,  he  consumes  enough  meat  and  wine  at  his  meal  to  pro- 
vide for  twenty  ordinary  mortals,  or  when,  in  order  to  offer 
the  pleasures  of  the  chase  to  his  guests,  he  converts  into 
hunting  grounds  land  that  would  have  produced  food  for 
hundreds  of  human  beings,  his  luxury  is  not  justifiable. 

In  all  these  examples  the  consumer  of  the  luxury  does  not 
contribute  to  social  progress.2 

It  must  not  be  supposed  that  the  deplorable  effects  of 
luxury  which  wastes  labor  and  wealth  are  imputable  only  to 
the  rich.  There  are  luxuries  among  the  poor  which  are  no 
less  detrimental  to  society.  The  sums  that  the  poor  spend 
daily  for  drink  amount  to  much  more  than  the  value  of  the 
pearl  which  Cleopatra  threw  into  her  wine-cup,  and  which 

1  M.  Leroy-Beaulieu  says  that  perhaps  a  man  has  saved  millions  in  order 
that  his  wife  may  wear  laces  and  jewellery.    This  is  possible.    But  if  he  has 
earned  these  millions  only  to  employ  them  in  this  manner,  of  what  use  has  he 
been  to  society  ? 

2  The  pro  and  con  of  the  matter  have  been  discussed  ever  since  antiquity. 
For  the  arguments  against  luxury,  consult  Laveleye's  "Le  Luxe  "  ;  for  the 
opposite  argument,  Leroy-Beaulieu' s  "Traite"  d'F,conomie  Politique."     M. 
Baudrillart  has  given  a  mass  of  information  in  four  volumes  entitled  "  His- 
toire  du  Luxe."    It  is  well  known  that  in  Antiquity  and  in  the  Middle  Ages 
(and  some  of  our  colonies)  sumptuary  laics  were  passed,  prohibiting  expendi- 
ture for  luxury.    Cf.  Reseller's  "  Political  Economy." 


676  PRINCIPLES   OF   POLITICAL   ECONOMY 

is  supposed  to  have  cost  300,000  sesterces.    The  queen,  more- 
over, was  not  poisoned  by  it.1 

What  should  be  said  of  art  ?  Is  it  a  luxury  ?  This  is  in- 
deed the  general  opinion,  and  economists  are  somewhat  at  a 
loss  how  to  justify  art.  If,  however,  we  recall  the  defini- 
tion we  have  given  of  luxury,  we  shall  see  that  it  implies  no 
condemnation  of  art,  even  though  we  regard  it  from  the 

1  Drunkenness  is  a  terrible  form  of  luxury,  more  ruinous  than  any  other, 
at  least  for  the  poorer  classes  of  society  —  most  other  luxuries  being  inacces- 
sible to  them.  According  to  the  United  States  Census  of  1900,  the  capital 
invested  in  the  production  of  all  kinds  of  alcoholic  liquors  was  over  $457,- 
000,000,  and  the  annual  product  was  valued  at  about  $340,000,000.  The 
materials  used  were  valued  at  $70,000,000,  and  the  average  number  of  per- 
sons employed  the  whole  census  year  was  over  52,000.  The  total  consumption 
in  this  country  for  the  year  1900,  taking  into  account  exports  and  imports, 
was  1,322,166,685  gallons,  or  17.3  gallons  per  capita.  It  is  probable  that  not 
more  than  1  per  cent  of  this  was  consumed  in  the  arts,  manufactures,  and 
for  medicinal  purposes.  Carroll  D.  Wright  estimates  that  the  161,483  places 
or  establishments  in  the  United  States  which  pay  a  federal  tax  to  engage  in 
the  traffic  have  a  capital  of  nearly  $960,000,000,  in  the  hands  of  191,000  pro- 
prietors or  firm  members,  with  nearly  242,000  employees. 

But  the  direct  economic  expenditure  of  labor  and  capital  is  insignificant 
when  we  consider  the  incalculable  loss  through  disease,  incapacity  for  work, 
insanity,  crime,  and  suicide  due  to  drink.  Intemperance  is  one  of  the 
gravest  social  problems  and  has  been  made  the  subject  of  numerous  investi- 
gations. Probably  the  two  most  important  remedies  proposed  are :  — 

(1)  Private  initiative  and  propaganda  by  means  of  temperance  societies, 
such  as  have  succeeded  in  reducing  the  use  of  alcohol  in  the  United  States  and 
England.      In  Sweden  and  Norway,  private  societies  with  state  assistance 
have  taken  the  place  of  the  ordinary  saloon-keepers;  there  are  no  saloons 
near  factories,  and  liquors  are  not  sold  by  the  glass,  but  only  by  the  quart. 

(2)  Government  intervention,  limiting  the  number  of  saloons  or  forbidding 
the  rum-traffic  entirely.     Sometimes  the  government  itself,  as  in  Russia  and 
Switzerland,  has  a  monopoly  of   the  trade  in  alcohol,  in  order  to  restrict  its 
sale  or  at  least  to  prevent  adulteration.      In  three  states  of  the  Union  the 
laws  prohibit  the  sale  of  intoxicating  drinks — Kansas,  Maine,  and  North 
Dakota.     (New  Hampshire  and  Vermont  have  recently  abandoned  prohibi- 
tion in  favor  of  local  option.)     In  most  of  the   states  each  local  commu- 
nity decides  the  question  whether  it  will  permit  the  sale  or  not ;  this  is  called 
local  option.    The  Norwegian  or  Gothenburg  system  of  monopoly  under  gov- 
ernment control  has  been  adopted  in  a  modified  form  in  South  Carolina. 

(See  Carroll  D.  Wright's  "Practical  Sociology,"  2d  edition,  Chapter  23.) 


ART   AND   LUXURY  677 

purely  economic  point  of  view.  Genuine  art  does  not  require 
an  amount  of  labor  disproportionate  to  the  result.  Quite 
the  contrary !  A  piece  of  marble  and  a  chisel,  a  square  yard 
or  more  of  canvas  and  a  few  tubes  of  paint,  added  to  a  few 
hours  of  labor,  are  sufficient  to  provide  exquisite  enjoyment 
that  may  be  repeated  throughout  innumerable  generations  of 
mankind.  If  a  lover  of  art  spends  half  a  million  for  one  of 
Raphael's  paintings,  this  may  be  a  folly  from  the  purely  per- 
sonal point  of  view.  But  from  the  social  point  of  view  the 
question  is :  Did  the  painting  cost  the  artist  an  amount  of 
labor  or  of  capital  disproportionate  to  the  pleasure  it  pro- 
vides ?  Certainly  not.  Art  is  characterized  by  the  produc- 
tion of  great  effects  through  very  simple  means ;  and  this  is 
precisely  the  contrary  of  luxury.1 

III.  Consumers'  Associations 

Men  generally  do  not  like  to  deprive  themselves  of  any- 
thing useful ;  they  would  fain  find  some  means  of  reducing 
their  expenses  and  "  putting  aside  "  a  larger  share  of  their 
income,  without  reducing  the  quantity  or  lowering  the  quality 
of  the  objects  they  consume.  This  apparent  impossibility 
is  accomplished  by  various  kinds  of  associations,  some  of 
which  are  exceedingly  important. 

(1)  The  common  household.  When  several  persons  join 
together  in  the  use  of  one  house  and  garden,  or  for  the  com- 
mon enjoyment  of  the  same  imperishable  goods,  or  for  the 
common  hire  of  a  cook,  they  can  certainly  obtain  the  same 
gratification  with  less  expense.  The  economy  of  life  in  con- 
vents, military  barracks,  and  boarding-houses  is  proof  enough. 

This  economy  is  due  to  the  same  causes  that  make  large- 
scale  production  cheaper  than  isolated,  small-scale  produc- 

1  In  another  sense,  however,  it  may  be  said  that  art  is  a  luxury.  Every 
important  art  always  presupposes  the  waste  of  a  great  quantity  of  productive 
energy,  inasmuch  as  there  is  only  one  successful  artist  for  a  hundred  whose 
time  and  labor  are  spent  uselessly.  But  the  same  is  true  of  all  careers  that 
appeal  to  human  vanity,  — politics,  for  example. 


678  PRINCIPLES    OF    POLITICAL   ECONOMY 

tion,  —  causes  which  (see  page  161)  find  a  similar  appli- 
cation with  reference  to  consumption.  For  this  reason 
communists  have  held  that  the  present  method  of  living  in 
small,  separate  family  groups,  is  extremely  wasteful  of  wealth 
and  energy.  Each  separate  family  now  has,  or  endeavors  to 
have,  its  own  house,  its  own  garden,  its  own  domestic  ser- 
vants, its  own  horses  and  carriages,  although  it  would  be  to 
every  one's  infinite  advantage  to  constitute  larger  groups  of 
consumers  which  could  make  better  use  of  all  their  oppor- 
tunities and  economize  an  enormous  amount  of  wealth  and 
labor.  Consider  the  great  waste  of  food  and  fuel  alone 
when  each  of  the  innumerable  small  families  in  the  same  town 
provides  its  own  meals,  buys  its  cooking  utensils,  stoves,  etc., 
and  hires  a  cook.  Would  it  not  be  infinitely  better,  cheaper, 
and  simpler,  to  group  a  score  or  more  families  in  a  large, 
well-equipped  apartment-house,  having  but  one  set  of  cook- 
ing utensils,  a  better  equipment  than  any  separate  family 
could  have,  and  employing  enough  expert  servants  to  do  the 
work  better  than  before  ?  It  is  maintained  that  this  would 
be  an  almost  incalculable  saving  of  energy  and  wealth,  a  great 
step  forward,  and  an  unquestionable  benefit  for  humanity  as 
a  whole.  No  one  has  developed  this  scheme  more  brill- 
iantly or  in  greater  detail  than  Fourier,  in  describing  his 
"  phalanstery." 

The  system  of  living  together,  although  it  offers  the  incon- 
testable advantage  of  effecting  a  great  saving,  unfortunately 
suppresses  family  life  by  destroying  the  home,  and  the  home 
has  ever  been  one  of  the  most  important  wants  of  man. 
Human  nature  has  always  found  something  repugnant  in 
group-life  and  even  in  "  boarding  "  in  common.  Nor  must 
we  lose  sight  of  the  fact  that  the  real  aim  of  wealth  is  to  pro- 
vide enjoyment.  Ought  we  to  sacrifice  all  the  blessings  of 
family  intimacy,  the  happiness  and  the  moral  influences  of 
home  life,  simply  in  order  to  save  part  of  our  expenditure  ? 

(2)  Purchase  in  common.  Without  binding  ourselves  to 
a  life  in  common,  or  forming  the  habit  of  sleeping  under  the 


COOPERATIVE    PURCHASE  679 

same  roof  and  eating  at  the  same  table,  many  of  the  advan- 
tages of  living  together  may  be  realized,  at  least  in  part,  by 
cooperative  associations  in  which  a  number  of  persons  unite 
to  make  their  purchases  jointly,  and  thus  obtain  the  advan- 
tages of  buying  at  wholesale  rates.  Robert  Owen  appears  to 
have  been  the  inventor  of  this  kind  of  association.  But  the 
development  of  cooperative  consumption  is  most  closely  con- 
nected with  the  history  of  the  celebrated  Rochdale  Equitable 
Pioneers,  founded  in  1844.  More  than  one-fifth  of  the  whole 
British  population  now  purchases  its  goods  in  part  or  entirely  at 
the  stores  of  cooperative  associations.  The  members  of  these 
associations  meet  annually  in  a  congress,  publish  periodicals 
and  newspapers,  and  constitute  a  power  in  the  nation.  Most 
of  the  local  associations  are  grouped  into  a  large  federation, 
called  the  Cooperative  Union,  which  has  its  own  wholesale 
society,  transacting  an  enormous  amount  of  business  each 
year.  The  English  Wholesale  Society  in  1902  sold  $92,000,- 
000  worth  of  goods,  and  the  Scottish  Wholesale  Society  sold 
over  $30,000,000  worth ;  about  120,000,000  of  the  goods  thus 
sold  were  manufactured  by  the  wholesale  societies  themselves. 
These  societies,  which  own  a  fleet  of  merchant  vessels  that  go 
to  all  parts  of  the  world  to  purchase  goods,  do  not  limit 
themselves  entirely  to  commerce,  but  engage  in  production 
and  banking.1  Cooperative  consumption  (or,  as  it  is  some- 
times called,  distributive  cooperation)  is  carried  on  in  many 

1  See  the  annual  reports  of  the  Congress  of  the  Cooperative  Union,  pub- 
lished by  the  secretary,  J.  C.  Gray.  An  interesting  article  on  cooperation 
in  Italy  may  be  found  in  the  1902  Annual  of  the  Cooperative  Wholesale  So- 
cieties, published  at  Manchester.  A  brief  but  fairly  complete  account  of 
cooperation  and  kindred  movements  for  social  betterment  may  be  found  in 
Gide's  report  on  "^conomie  Sociale "  at  the  Paris  Exposition  of  1900 
(Paris,  Imprimerie  Nationale,  1902).  Consult  also  :  Hubert  Valleroux,  "  La 
Cooperation,"  Paris,  1904;  and  the  articles  by  Prof essor  F.  Parsons  in  the 
Arena  for  July  and  August,  1903. 

The  well-known  Belgian  cooperative  society,  "Vooruit,"  of  Ghent,  de- 
votes the  greater  part  of  its  profits  to  socialistic  propaganda,  and  the  share  of 
profits  distributed  to  the  members  is  not  paid  in  cash,  but  in  coupons,  good 
for  merchandise  at  the  cooperative  stores. 


680  PRINCIPLES    OF    POLITICAL   ECONOMY 

other  countries,  but  usually  on  a  smaller  scale  than  in  Great 
Britain.  There  are  probably  about  200  retail  "  cooperative 
stores"  in  the  United  States,  where  the  whole  cooperative 
movement  is  now  developing  with  surprising  rapidity. 

Most  consumers'  associations  are  patterned  after  the  so- 
called  Rochdale  type,  which  is  characterized  by  these  fea- 
tures :  —  (a)  Sales  for  cash  only  ;  (£)  sale  not  at  the  cost 
price,  but  at  the  customary  retail  price,  thus  bringing*  a  profit ; 
(<?)  the  distribution  of  a  large  part  of  profits  among  mem- 
bers, according  to  the  amount  of  purchases  they  have  made 
(and  not  according  to  the  capital  they  have  contributed,  for 
which  a  fixed  rate  of  interest  is  paid)  ;  (#)  the  use  of  a  cer- 
tain part  of  the  profits  for  social  and  educational  purposes. 

The  direct  advantages  of  these  associations  are  as  fol- 
lows :  — 

(1)  An  economy  in  the  cost  of  living.     When  cooperative 
societies  sell  goods  at  cost,  the  saving  is  obvious  and  imme- 
diate.    When  the  Rochdale  system  is  applied,  the  profits  are 
returned  at  the  end  of  each  year  or  six  months,  and  thus  the 
members  may  be  regarded  as  saving  money  unconsciously. 

(2)  Putting  a  stop  to  the  adulteration  of  goods,  and  thus 
providing  more  healthful  and  more  abundant  food. 

(3)  The  abolition  of  advertising  and  all  forms  of  commer- 
cial falsehood  and  trickery,  thus  raising  the  ethical  standard 
of  business  life. 

But  should  the  cooperative  movement  continue  to  develop 
in  the  future  as  rapidly  as  it  has  during  the  .past  half  century, 
its  ultimate  effects  will  amount  to  nothing  less  than  a  trans- 
formation of  economic  society,  characterized  especially  by 
the  following  features  :  — 

(1)  The  gradual  elimination  of  traders  and  the  class  of 
business  intermediaries. 

(2)  To  the  extent  that  consumers'  societies  devote  them- 
selves to  the  production  of  whatever  goods  they  require, 
there  will  be  a  decrease  in  the  number  and  importance  of 
individual  concerns  and  of  stock  companies,  and  a  falling  off 


THE  COST   OF   A   HOME  681 

in  the  profits  and  dividends  which  these  concerns  and  com- 
panies are  able  to  pay. 

(3)  A  decrease  in  the  number   of  large  fortunes  and   an 
increase  in  the  number  of  small  ones  built  up  by  cooperative 
saving.     Cooperation  will  accomplish  this  by  doing  away 
with  the  causes  to  which  large  incomes  and  great  fortunes 
are  due. 

(4)  The  perfect  adjustment  of  production  and '  distribution, 
and  the  suppression  of  crises  and  of  the  loss  of  work  by  large 
numbers  of  laborers  affected  by  these  crises.     Cooperation 
will   accomplish  this   eminently  desirable  result  simply  by 
producing  only  the  amount  of  goods  required  by  the  organ- 
ized consumers. 

IV.   The  Cost  of  Housing 

Of  all  expenditures,  that  for  shelter  is  entitled  to  special 
consideration,  not  only  because  it  tends  to  absorb  an  increas- 
ing share  of  the  family  income,  but  also  because  the  home  is, 
from  the  social  point  of  view,  perhaps  the  most  important 
human  want. 

In  antiquity,  the  custom  of  renting  a  home  was  unknown  ; 
the  home  was  not  only  the  place  of  residence,  but  also  the 
altar  of  the  household  gods,  and  every  person,  rich  or  poor, 
had  a  home  of  his  own.  To-day,  however,  the  economic 
conditions  of  life  compel  men  to  live  like  nomads  ;  they 
usually  do  not  stay  where  they  were  born,  and  they  live  for 
the  most  part  in  hired  apartments.  All  the  social,  economic, 
and  political  influences  that  prompt  men  to  agglomerate  in 
large  cities, — the  tendency  toward  centralized  administration, 
production  on  a  large  scale,  the  growth  of  railroads,  city 
amusements  and  dissipations,  —  have  caused  a  steady  increase 
in  the  cost  of  renting  houses  and  apartments.  This  is  very 
profitable  to  urban  property-owners,  but  detrimental  to  the 
general  public.1 

1  In  1790  there  were  six  cities  in  the  United  States  with  a  total  population 
of  131,472,  or  3.4  per  cent  of  the  entire  population;  in  1850  there  were  85 


682  PRINCIPLES    OF   POLITICAL    ECONOMY 

This  state  of  affairs  is  not  particularly  disturbing  for  the 
rich,  but  it  is  a  serious  matter  for  the  poor.  Higher  rents, 
which  oblige  the  working  people  to  congregate  in  miserable 
quarters,  produce  most  deplorable  results  from  the  hygienic 
as  well  as  the  moral  point  of  view.  Most  of  the  vices  that 
afflict  the  working  population, — the  loosening  of  family  ties, 
the  habit  of  frequenting  rumshops,  the  debauchery  of 
children,  and  even  such  terrible  social  evils  as  high  death- 
rates  and  epidemics,  —  are  due  especially  to  this  cause.  It 
is,  moreover,  impossible  to  conceive  of  normal  human  exist- 
ence without  a  certain  degree  of  home  comfort.. 

The  only  effectual  remedy  for  such  evils  would  be  a  ces- 
sation of  the  growth  of  cities,  and  a  return  to  rural  life  on 
the  part  of  those  who  have  abandoned  it.  But  there  are  no 
signs  pointing  to  such  a  reaction.  In  many  of  our  large 
cities,  however,  we  may  observe  the  beginning  of  a  centrifu- 
gal movement  that  is  carrying  the  people  away  from  the 
congested  parts  of  the  city.  Modern  methods  of  cheap  and 
rapid  local  transportation  have  led  people  to  choose  homes 
not  in  the  centres  of  cities,  but  in  the  outskirts  and  the  sub- 
urban districts  ;  the  central  parts  are  almost  entirely  taken 
up  by  business  houses  and  offices.  Suburban  homes  are  not 
only  cheaper  but  more  healthful.1 

Meanwhile,  another  remedy  —  and  a  most  practical  one  — 
consists  in  the  construction  of  houses  built  to  be  rented  to 
workmen,  or  built  with  the  intention  that  they  shall  some 
day  become  the  laborers'  property  by  the  payment  of  small 
instalments.  Six  somewhat  different  schemes  have  been 
suggested  for  accomplishing  this  :  — 

(1)  Cooperative  building  societies  formed  by  the  workers 

cities  with  a  total  of  nearly  3,000,000,  or  12£  per  cent  of  the  whole  popula- 
tion. The  census  of  1900  shows  545  cities  (i.e.  incorporated  places  with  a 
population  of  at  least  8000)  having  a  total  of  nearly  25,000,000  inhabitants, 
or  33. 1  per  cent  of  the  entire  population. 

1  Some  interesting  figures,  showing  that  the  problem  of  the  "  slums  "  (the 
dense,  unhealthful  city  quarters  of  the  laboring  population)  is  becoming  less 
acute,  are  given  in  Wright's  "Practical  Sociology  "  (2d  ed.,  1902). 


SCHEMES   FOE   LABOKERS'    HOMES 

themselves.  (We  have  given  an  account  of  building-  and 
loan  associations  on  page  397.)  These  societies  are  numer- 
ous in  England  and  the  United  States.  In  the  city  of  Phila- 
delphia, sometimes  called  the  city  of  homes,  these  societies 
have  built  more  than  60,000  houses,  each  inhabited  by  a 
working-man's  family. 

(2)  Associations    of    a    half-philanthropic,   half-financial 
nature,  which  construct  comfortable,  salubrious  homes  for 
workmen,  and  which  are  satisfied  with  only  a  small  profit 
on  their  investment,  —  say  3  or  4  per  cent.     Several  large 
tenement  houses  in  New  York  have  been  built  upon  this 
plan  recently.1 

(3)  The  establishment  of  perpetual  funds  to  be  used  for 
the  construction  of  working-men's  homes.     The  rent  of  these 
homes  is  then  employed  to  construct  still  others,  so  that  the 
results  of  the  scheme  increase  by  a  sort  of  geometrical  pro- 
gression.    An  example   of  this  is  the  celebrated  Peabody 
Fund  in  London,  which  is  thirty  years  old,  and  which  now 
provides  homes  for  20,000  tenants,  living  in  5073  apartments. 

(4)  The  construction  of  houses  by  cooperative  consumers' 
societies  for  their  own  members.     As  these  societies  aim  to 
provide  their  members  with  all  the  necessaries  of  life,  why 
should  they  not  also  provide  homes?     English  cooperative 
societies  have  already  built  more  than  24,000. 

(5)  The  construction  of  houses  by  municipalities.    Berne, 
Glasgow,  and  other  large  cities  have  undertaken  to  do  this. 
In  Germany,  the  central  government  gives  bounties  to  socie- 
ties, for  building  working-men's  homes.2 

1  This  category  should  also  include  laborers'  houses  built  by  large  em- 
ployers or  manufacturing  concerns  for  their  employees   in  the  vicinity  of 
their  place  of  work.      Many  concerns  which  are  situated  far  from  the  large 
cities  are  obliged  to  do  this  to  provide  lodging  for  their  workers.     These 
houses  are  usually  rented  for  a  merely  nominal  sum.     Socialists  and  parti- 
sans of  labor  detest  this  arrangement,  because  the  consequent  dependence 
of  the  laborer  on  his  employer,  they  hold,  deprives  him  of  his  independence 
and  reduces  him  practically  to  serfdom. 

2  The  collectivists  would  not  only  require  the  state  or  the  city  government 
to  build  houses  for  the  workers,  but  to  take  possession  (with  or  without 


684  PRINCIPLES   OF   POLITICAL   ECONOMY 

(6)  The  hire,  by  philanthropic  societies,  of  homes  already 
in  existence,  with  a  view  to  improving  and  sub-letting  them 
to  laborers  on  favorable  terms  ;  and  providing,  so  to  speak, 
for  the  economic,  aesthetic,  and  moral  education  of  those 
that  inhabit  them.  This  system,  which  is  closely  associated 
with  the  name  of  Miss  Octavia  Hill,  who  has  applied  it  in 
London  for  twenty -five  years,  is  designed  primarily  for  the 
poorest  classes  of  society.  Miss  Hill  has  pertinently  re- 
marked that  there  is  no  use  attempting  to  make  the  poor  the 
owners  or  even  the  tenants  of  model  homes  unless  we  have  pre- 
viously changed  their  habits  of  life,  given  them  the  sense  of 
cleanliness  and  comfort,  and  taught  them  to  appreciate  a  home. 

The  first  five  schemes  mentioned  above  aim  either  to  make 
the  workman  the  owner  of  his  home,  or,  merely  a  tenant. 
Which  aim  is  the  better  ?  The  English  and  American 
laborer  much  prefers  having  a  home  of  his  own ;  the  French 
workman  cares  less  about  it.  The  ownership  of  a  house,  in 
spite  of  its  advantages  from  the  moral  and  economic  point 
of  view,  involves  certain  inconveniences  for  the  workman. 
When  he  is  tied  down  to  a  given  locality,  it  is  difficult,  if 
not  impossible,  for  him  to  move  from  one  place  to  another, 
and  to  offer  his  labor  in  the  market  where  it  may  be  in 
greatest  demand  ;  he  is  more  dependent  on  his  employer 
than  is  otherwise  the  case. 

indemnification)  of  all  houses,  and  permit  the  people  to  live  in  them  either 
at  cost  or  gratuitously.  This  would  be  the  system  of  nationalization  applied 
to  urban  property. 

In  generalizing  this  system  of  nationalization,  the  following  difficulties 
present  themselves :  — 

(a)  If  the  government  furnished  homes  free  of  charge,  it  would  probably 
soon  be  bankrupt.  This  arrangement,  moreover,  would  probably  aggravate 
the  present  unhealthful  tendency  toward  the  too  rapid  growth  of  cities.  For 
if  the  government  undertook  to  provide  a  home  for  everybody  in  the  cities, 
few  people  would  be  willing  to  live  in  the  country. 

(6)  If,  on  the  other  hand,  the  government  obliged  its  tenants  to  pay 
their  rent  punctually,  and  should  attempt  to  expulse  them  in  case  of  their 
failure  to  pay,  the  government  would  soon  become  fully  as  unpopular  as  the 
present  property-owners,  and  would  find  it  difficult  to  collect  rents. 


ABSENTEEISM  685 

V.  Absenteeism 

The  term  absenteeism  is  used  to  designate  the  custom 
among  wealthy  property-owners  of  living  abroad,  or  at  least 
away  from  their  estates.  This  custom  gives  rise  to  the 
question  whether  undesirable  consequences  for  the  home 
country,  and,  vice  versa,  desirable  effects  for  the  places  in 
which  they  live,  do  not  result  therefrom.  It  is  an  extremely 
complex  question,  and  we  can  here  indicate  only  some  of  its 
main  features. 

From  the  moral  point  of  view  absenteeism  is  severely  con- 
demned. But  it  is  necessary  to  make  a  distinction.  The 
condemnation  is  well  founded  as  regards  landed  proprietors, 
because  the  possession  of  land  is,  as  we  have  seen,  a  social 
function ;  and  a  social  function  cannot  properly  be  performed 
by  proxy.  We  may  even  set  up  the  universal  rule  that  all 
social  duties  should  be  performed  personally,  and  not  by 
proxy.  Property  in  land,  justifiable  upon  grounds  of  public 
utility,  has  no  just  foundation  whatever  when  the  owner  does 
nothing  but  collect  rents,  and  lives  at  a  distance ;  his  very 
absence  proves  that  he  leads  the  life  of  a  parasite.  More- 
over, aside  from  this  theoretical  consideration,  experience  has 
frequently  demonstrated  (in  Ireland,  for  example)  that  the 
absenteeism  of  landowners  who  delegate  their  powers  to 
agents  or  middlemen  involves  the  ruin  both  of  the  farmers 
and  of  agriculture  itself. 

But  the  problem  of  absenteeism  is  a  somewhat  different  one 
in  the  case  of  capitalists ;  their  social  function  consists  in  the 
accumulation  and  investment  of  capital,  and  does  not  bind 
them  to  one  place  more  closely  than  to  another.  In  fact,  a 
certain  degree  of  cosmopolitanism  is  quite  useful  in  helping 
one  to  invest  money  most  intelligently  and  to  keep  track  of 
one's  investments. 

From  the  purely  economic  point  of  view,  absenteeism  is 
condemned  because,  it  is  said,  the  man  who  spends  his  money 
away  from  home  does  not  enable  his  neighbors  to  profit  by 


686  PRINCIPLES   OF  POLITICAL   ECONOMY 

his  expenditure,  but  helps  foreigners  or  strangers  to  profit 
thereby.  The  sojourn  of  rich  foreigners  in  Switzerland,  in 
Italy,  at  Paris,  and  on  the  Riviera,  is  regarded  as  a  source  of 
wealth  to  the  population  of  these  places.  Now  it  is  evident 
that  if  the  residence  of  rich  foreigners  means  profit  to  the 
places  in  which  they  reside,  their  absence  from  home  must 
involve  an  equal  loss  to  their  native  countries.  What  a  man 
spends  abroad  cannot  be  spent  or  invested  at  home. 

It  may,  however,  be  held  that  when  English  travellers 
in  Switzerland,  for  example,  spend  two  million  dollars  in 
that  country,  they  consume  Swiss  products  of  a  value  exactly 
equivalent  to  the  sum  spent,  and  that  this  English  money 
will  be  used  later  for  the  purchase  of  goods  imported  into 
Switzerland  from  England  (according  to  the  economic  law  ex- 
plained on  page  801,  note  1) ;  so  that  after  all  there  has  been 
simply  an  exchange  of  English  goods  for  Swiss  goods.  This 
objection,  however,  is  not  valid.  The  sum  paid  by  English 
residents  is  probably  much  greater  than  the  value  of  the 
goods  or  services  received  in  exchange  for  it,  for  the  follow- 
ing two  reasons :  —  (a)  Foreigners  generally  pay  more  for 
things  than  they  are  really  worth.  Although  the  practice 
is  unfair,  it  is  well  known  that  in  nearly  all  places  fre- 
quented by  foreigners  there  are  two  prices  for  goods,  —  one 
price  for  natives  and  one  for  foreign  purchasers.  (6)  Very 
often  the  foreigner  pays  for  the  use  of  wealth  that  is  not 
really  of  a  consumable  or  destructible  nature.  When  a 
traveller,  in  renting  a  villa  for  the  season,  or  taking  a  guide 
for  the  day,  buys  the  right  to  enjoy  a  beautiful  climate,  to 
breathe  pure  air,  or  to  have  a  view  of  the  sea  or  the  moun- 
tains, he  deducts  nothing  from  the  wealth  of  the  country ;  he 
pays  a  rent  similar  to  the  rent  paid  to  every  one  having  the 
monopoly  of  a  natural  advantage.  Why,  indeed,  should  not 
the  scenery  of  Switzerland,  the  azure  seas  of  the  Riviera,  the 
waterfalls  of  Norway,  and  the  historical  associations  which 
cling  to  the  cities  of  Italy,  represent  wealth  for  these  coun- 
tries quite  as  truly  as  coal  mines  or  petroleum  wells  ? 


ABSENTEEISM  687 

The  same  thing,  moreover,  is  true  for  individuals.  If  I 
have  some  sort  of  natural  curiosity,  a  grotto,  or  a  ruin,  in 
my  garden,  and  I  ask  each  visitor  to  pay  a  quarter  to  see  it, 
obviously  my  income  is  increased  by  what  these  visitors  pay 
for  admission. 

Classical  economists  may  reply  that  the  ultimate  result  of 
such  expenditure  is  merely  a  displacement  of  money,  its 
simple  transfer  from  one  country,  or  one  person,  to  another ; 
we  have  seen  with  what  superb  indifference  these  economists 
regard  the  increase  or  decrease  of  the  quantity  of  money. 
But  have  we  not  frequently  had  occasion  to  note  that  the 
amount  of  money  in  a  country  is  not  a  matter  of  indiffer- 
ence ?  (See  pages  222  and  298.) 


CHAPTER  II  — SAVING 
I.   The  Conditions  Necessary  for  Saving 

SAVING,  we  have  already  said,  is  really  one  kind  of  con- 
sumption; it  is  postponed  consumption.  Man,  instead  of 
satisfying  only  his  immediate  needs,  thinks  of  his  future 
wants  and  "  puts  something  aside  "  for  to-morrow,  or  for  his 
old  age,  or  for  his  children. 

In  ordinary  speech,  and  even  in  the  language  of  econo- 
mists, saving  is  generally  allied  with  investment,  i.e.  the 
productive  employment  of  savings.  But  the  two  acts  are 
entirely  independent.  Saving  is  a  distinct  operation  with  a 
purpose  of  its  own;  viz.,  to  provide  for  the  satisfaction  of 
future  wants.  Although  popular  opinion  regards  it  with 
little  favor  and  calls  it  hoarding,  saving  is  an  economic  act  of 
considerable  importance.  Even  some  animals,  of  which  the 
ant  offers  a  familiar  example,  practise  saving  (but  not  invest- 
ment). Like  work  and  the  division  of  labor,  it  is  a  variety 
of  .economic  activity  not  confined,  to  mankind,  but  familiar 
to  animals  also ;  it  may  be  called  a  natural  economic  func- 
tion. Nevertheless,  we  must  not  believe  that  saving  is  spon- 
taneous and  takes  place  of  its  own  accord.  On  the  contrary, 
several  by  no  means  simple  conditions  must  be  fulfilled  before 
saving  can  take  place  among  mankind. 

(1)  As  a  subjective  condition  to  saving  there  must  be  a 
certain  degree  of  foresight,  i.e.  the  peculiar  faculty  which 
consists  in  feeling  a  future  want  as  though  it  were  present. 
The  man  who  intends  to  save  puts  two  wants  in  the  balance, 
—  a  present  want  which  he  must  forego,  and  a  future  want 
for  which  he  desires  to  provide.  The  present  want,  for  in- 
stance, is  the  desire  to  consume  more  food ;  the  future  want, 
perhaps,  is  a  desire  to  make  provision  for  a  comfortable  old 

688 


THE  NATURE  OF   SAVING  689 

age.  On  the  one  hand,  a  man  is  restrained  from  saving  by 
the  thought  of  the  present  sacrifice  that  it  involves.  On  the 
other  hand,  he  is  influenced  by  the  advantage  that  he  expects 
to  receive  from  saving.  His  choice  oscillates  between  two 
opposing  influences,  and  according  to  the  strength  of  the  one 
or  the  other  his  conduct  is  determined.  (See  page  82.) 
Note  that  the  present  want  is  a  reality  ;  it  is  felt  now.  But 
the  future  want  is  largely  an  abstraction,  a  product  of  the 
imagination.  Saving  therefore  presupposes  a  certain  degree 
of  mental  development  and  the  presence  of  those  intellectual 
qualities  which  make  abstract  thought  possible.  And  these 
qualities,  we  must  remember,  are  primarily  the  result  of 
advanced  civilization. 

Our  education,  as  well  as  the  present  organization  of  society, 
accustom  us  to  think  constantly  of  the  future.  The  habit  of 
constantly  looking  forward  is  a  distinctive  characteristic  of 
modern  civilization.  Scientists  seek  to  penetrate  the  secrets 
of  future  ages  ;  statesmen  look  anxiously  forward  to  the  mor- 
row ;  business  men  try  to  gauge  the  future  standing  of  the 
market,  and  involve  themselves  in  transactions  the  outcome 
of  which  will  long  remain  unknown;  shopkeepers  prepare  to 
meet  the  obligations  that  fall  due  months  and  years  hence. 
All  of  us  are  more  or  less  concerned  for  the  future  and  attempt 
to  make  some  reckoning  of  what  this  unknown  quantity  is. 
The  intellectual  effort  which  such  an  attitude  involves  is  im- 
possible for  the  savage,  who  is  conscious  only  of  present  needs ; 
who,  as  Montesquieu  declared,  "cuts  down  the  tree  to  get 
the  fruit."  Such  intellectual  effort,  moreover,  is  difficult 
even  for  those  of  our  own  fellow-citizens  whose  social  con- 
dition and  whose  mental  habits  resemble  those  of  primitive 
mankind,  and  who  live,  as  they  do,  from  hand  to  mouth. 
Savages,  children,  paupers,  vagabonds,  are  all  improvident, 
and  for  precisely  the  same  reasons. 

(2)  As  an  objective  condition  to  saving,  it  must  be  possible 
to  preserve  the  commodity  saved.  Under  ordinary,  natural  cir- 
cumstances, this  condition  is  rarely  fulfilled.  There  are  few 


690  PRINCIPLES  OF   POLITICAL  ECONOMY 

objects  of  consumption  the  use  of  which  can  be  postponed 
without  danger  of  deterioration  or  total  loss  of  utility  and 
value.  Things  often  deteriorate  quite  as  rapidly  when  they 
are  not  in  use  as  when  they  are  used.  Furniture  and  clothes 
wear  out  and  fade ;  linen  tears  and  grows  yellow,  even  in  the 
closet;  iron  rusts;  food  decays  or  is  devoured  by  insects; 
even  wine,  after  improving  with  years,  later  loses  its  quality. 
The  grain  stored  away  by  the  ant  (although  grain  is  easily 
stored  and  partly  for  this  reason  is  an  important  kind  of 
wealth),  and  the  nuts  saved  by  squirrels,  cannot  be  saved 
longer  than  a  year  except  with  great  care. 

Until  money,  or  at  least  some  precious  metal,  was  used  as 
a  store  of  value,  saving  was  very  narrowly  limited  by  the 
lack  of  a  suitable  object  to  save.  The  invention  of  money 
facilitated  saving,  and  subsequently  made  possible  the  mar- 
vellous enterprises  of  modern  times.  Gold  and  silver  are, 
as  we  have  seen,  nearly  the  only  immutable  substances. 
Although,  to  be  sure,  they  are  not  themselves  objects  of 
consumption,  they  may  at  any  time  be  exchanged  for  objects 
of  consumption.  Instead  of  trying  to  store  up  perishable 
objects,  a  man  (who  wants  to  save)  exchanges  these  objects 
for  money,  puts  the  money  in  a  safe  place,  and  at  any  sub- 
sequent time  he  or  his  descendants  may  exchange  this  money 
for  whatever  kind  of  wealth  they  choose.  Even  when  men 
discover  a  treasure  that  has  been  hidden  for  centuries,  this 
treasure  may  be  regarded  as  a  power  to  consume,  the  exer- 
cise of  which  has  been  long  postponed,  but  which  is  finally 
employed  by  the  fortunate  finders. 

The  invention  of  credit,  furthermore,  provided  mankind 
with  an  instrument  for  saving  that  is  more  marvellous  even 
than  money.  Here,  let  us  say,  is  a  man  with  a  fortune  of 
$1000,  which,  if  he  chooses,  he  may  consume  at  once.  But 
he  prefers  to  postpone  its  consumption.  The  fact  that  he 
does  not  now  care  to  make  use  of  his  right  to  consume  does 
not  destroy  or  curtail  this  right ;  its  exercise  is  simply  post- 
poned. At  any  time  in  the  future  he  or  his  descendants 


SAVINGS   INSTITUTIONS  691 

still  possess  the  right  to  consume  an  equivalent  amount  of 
wealth.  They  cannot,  of  course,  consume  the  wealth  that 
was  originally  created,  for  that  has  been  consumed  by  others. 

(3)  Before  a  man  can  save,  his  labor  must  yield  more  than 
the  necessaries  of  life.     It  is  often  unwise  to  ignore  future 
wants  and  care  only  for  the  present ;  but  it  is  madness,  on 
the  other  hand,  to  sacrifice  the  present  for  the  future.    To 
run  the  risk  of  dying  now  of  hunger,  for  fear  of  famishing  ten 
or  twenty  years  hence,  is  worse  than  miserly;  it  is,  in  fact,  one 
of  the  traits  that  make  avarice  so  ridiculous  and  contempt- 
ible.    We  shall  see  that  to  make  too  great  present  sacrifices 
for  the  sake  of  future  consumption  is  not  only  contrary  to  the 
interest  of  the  individual,  but  also  that  of  society  as  a  whole. 
(See  page  695.) 

The  man  who  has  just  enough  to  live  cannot  have  any  sur- 
plus for  saving ;  for  him  it  would  be  detrimental  and  even 
dangerous  to  save,  since  saving  would  mean  to  forego  some 
essential  want.  But  for  the  man  who  has  a  superabundance 
of  wealth,  saving  can  hardly  be  regarded  as  a  sacrifice ; 1  it 
may  even  become  a  necessity,  since  man's  power  to  consume 
is  limited,  even  though  he  be  a  second  Gargantua.  Our 
wants  and  even  our  desires  have  a  limit,  which  nature  has 
indicated  by  the  feeling  of  satiety.  (See  page  43.) 

(4)  Finally,  there  must  be  institutions  or  devices  for  facili- 
tating saving,  or   at   least   for   making   it  possible.     These 
means  or  institutions  may  be  nothing  more  than  barns  for 
saving  wheat,  cellars  for  storing  wine,  or  safes  for  keeping 
money.     Modern  society,  howeVer,  has  done  more  than  this 

1  Economists  have  sometimes  emphasized  the  sacrifice  involved  in  sav- 
ing and  called  it  abstinence.  Senior  regards  abstinence  as  the  source  of 
capital.  This  theory  exaggerates  the  moral  value  of  saving.  Socialists,  on 
the  other  hand,  ridicule  this  so-called  abstinence  and  the  privations  which 
the  capitalist  is  supposed  to  undergo.  Lassalle,  particularly,  attacked  this 
doctrine  with  keen  satire.  Both  the  advocates  of  the  theory  and  its  socialistic 
opponents  have  an  ultimate  object  in  view  :  the  former,  to  justify  the  reward 
of  capital ;  the  latter,  to  discredit  it.  In  reality  both  are  right  in  part ;  the 
sacrifice  involved  in  saving  varies  from  infinity  to  zero. 


692  PRINCIPLES    OF   POLITICAL   ECONOMY 

to  encourage  and  facilitate  saving,  and  has  created  various 
institutions  which  we  shall  discuss  in  the  following  section.1 

II.  Institutions  to  Facilitate  Saving 

In  all  civilized  countries  there  are  many  ingenious  institu- 
tions and  devices  for  facilitating  saving. 

(1)  The  best  known  of  these  institutions  are  savings 
banks,  properly  so  called.  They  are  intended  to  encourage 
saving  by  taking  care  of  the  money  saved.  The  service  they 
render  the  depositor  consists  in  keeping  his  money  safe  from 
robbers  and  safe  from  himself.  By  keeping  a  man's  money 
and  preventing  him  from  yielding  too  easily  to  the  temp- 
tation to  spend  it,  the  savings  bank  performs  an  important 
function.  All  children  are  familiar  with  the  so-called 
"  penny  bank,"  consisting  usually  of  an  earthenware  jug  into 
which  coins  are  dropped  through  a  narrow  opening.  To  get 
possession  of  the  contents,  the  child  must  break  the  jug,  and 
this  slight  obstacle  is  supposed  to  give  enough  time  for  reflec- 
tion, and  to  enable  the  child  to  resist  the  temptation  to 
squander  the  contents. 

The  savings  bank  is  practically  the  same  thing.  The 
amount  deposited  in  the  bank  is,  of  course,  at  the  disposal 
of  the  owner.  Yet  it  is  no  longer  in  his  pockets,  or  in  his 
immediate  possession;  and  in  order  to  obtain  it  he  must  com- 

1  The  question  is  sometimes  asked  whether  or  not  another  condition  is 
also  requisite ;  namely,  the  payment  of  interest.  Most  economic  treatises 
insist  that  it  is  a  necessary  condition  for  saving.  We  regard  this  as  a  mis- 
take. Interest  must  be  paid  to  give  rise  to  investment,  as  we  shall  ex- 
plain later ;  but  saving  is  not  dependent  on  the  payment  of  interest.  The 
simple  desire  to  provide  for  future  wants  or  for  unforeseen  wants  is  sufficient 
to  give  rise  to  saving.  It  may  even  be  maintained,  without  being  paradoxi- 
cal, that  if  investment  at  interest  ever  became  impossible,  saving  or  hoarding 
would  not  be  done  away  with,  but  would  be  greatly  stimulated.  Take  a 
man  who  requires  $5000  a  year  to  live  satisfactorily.  If  the  current  rate  of 
interest  is  five  per  cent,  he  will  have  to  save  only  $100,000  in  order  to  live  on 
an  independent  income.  But  if  it  became  impossible  for  him  to  invest  his 
savings  at  interest,  he  would  be  anxious  to  store  up  as  much  capital  as  pos- 
sible for  future  use. 


THE   SOCIAL   UTILITY    OF   SAVING  693 

ply  with  certain  formalities  which  involve  somewhat  more 
time  and  trouble  than  breaking  the  "penny  bank." 

In  order  to  encourage  saving,  these  banks  pay  a  small  in- 
terest on  deposits  ;  but  this  interest  must  be  regarded  merely 
as  a  sort  of  premium  on  saving,  a  kind  of  stimulus,  and 
should  not  be  too  high.  The  business  of  the  savings  bank 
is  not  to  furnish  an  opportunity  for  investing  capital,  but  to 
enable  people  to  put  aside  a  little  money,  and  thus  to  create 
capital.  If,  when  this  capital  has  been  amassed,  the  depos- 
itor wants  to  invest  it,  i.e.  make  it  yield  interest,  he  may 
withdraw  it  from  the  bank  (the  role  of  the  savings  bank 
having  been  performed),  and  intrust  it  to  other  institutions, 
such  as  those  already  referred  to  in  the  sections  on  credit  and 
banks. 

Formerly  all  savings  banks  were  private  institutions ;  but 
to-day,  in  many  countries,  they  are  sometimes  founded  by  the 
government.  France  and  England,  for  instance,  have  sav- 
ings banks  connected  with  their  postal  system ;  innumerable 
post-offices  throughout  the  country  offer  opportunity  and 
encouragement  for  putting  aside  small  sums  of  money.  The 
governmental  savings  bank  of  Vienna,  Austria,  is  celebrated 
for  its  perfect  mechanism  and  economical  administration. 
In  France,  the  private  savings  banks  are  practically  govern- 
mental concerns,  for  they  are  obliged  to  deposit  their  funds 
in  the  Public  Treasury. 

(2)  Mutual  providential  societies  consist  of  persons  paying 
monthly  dues ;   at  the  end  of  a  certain  period,  say  twenty 
years,  the  accumulated  capital  is  divided  among  the  members. 
Men  can  save  more  when  they  are  organized  than  when  they 
are  isolated,  because  the  rule  of  monthly  payments  makes 
saving  a  habit  and  a   necessity,  and  because  organizations 
can  make  better  use  of  the  accumulated  funds  than  a  single 
individual.     Surviving  members,  moreover,  usually  profit  by 
the  sums  paid  by  those  who  die  before  the  funds  are  divided. 

(3)  Consumers'1  cooperative  societies,  although  the   name 
implies  the  intention  to  consume  and  not  to  save,  serve  also 


694  PRINCIPLES    OF   POLITICAL   ECONOMY 

as  savings  institutions  by  removing  the  obstacle  that  makes 
saving  so  difficult,  and  which  seems  nevertheless  to  be  a 
necessary  feature  of  all  saving,  viz.  abstinence  or  privation. 
These  societies  succeed  in  solving  the  apparently  insoluble 
problem  of  making  saving  automatic  and  unconscious.  Their 
plan,  which  we  have  already  described,  is  both  simple  and 
ingenious.  Goods  bought  at  wholesale  prices  are  sold  to  the 
members  at  the  customary  retail  prices,  and  the  profit  thus 
made  on  the  purchases  of  members  is  placed,  as  it  were,  to 
their  credit.  At  the  end  of  the  year,  a  proportionate  share 
of  the  total  profits  is  either  paid  out  to  each  member,  or  kept 
on  deposit  for  him.  Thus,  if  a  laborer  buys  $300  worth  of 
goods  in  a  cooperative  store,  and  the  store  makes  a  profit 
of  ten  per  cent,  he  may  be  said  to  save  $30.  This  saving 
involves  no  effort,  no  abstinence,  no  restriction  in  the  amount 
of  goods  he  consumes.  He  has  consumed  just  as  much  as 
before  ;  he  has  been  provided  with  goods  of  better  quality  ; 
he  has  paid  no  more  than  these  goods  would  cost  else- 
where ;  and  despite  all  this  he  has  actually  saved  money.  It 
may  be  said,  moreover,  that  the  more  the  laborer  buys,  the 
greater  is  the  sum  he  earns  for  himself ;  or,  to  put  it  some- 
what paradoxically,  the  more  he  spends  the  more  he  saves  ! 

(4)  Cooperative  credit  societies,  which  are  simply  popular 
banks  designed  to  receive  money  from  the  people  in  order 
to  return  it  to  them  in  the  form  of  loans,  serve  quite  as  well 
for  saving  money  as  for  lending  it ;  they  have  even  been 
called  "  perfected  savings  banks."  This  feature  characterizes 
the  German  people's  banks  founded  by  Schulze-Delitzsch 
(see  page  396)  and  the  Italian  people's  banks  founded  by 
Luzzatti. 

III.    The  Social  Utility  of  Saving 

The  social  usefulness  of  saving  consists  in  forming,  by 
means  of  united  individual  savings,  large  amounts  of  capital 
that  can  be  employed  by  business  enterprises  according  to 
their  needs.  Saving  possesses  the  same  utility  for  society  as 


THE  SOCIAL   UTILITY   OF   SAVING  695 

a  whole  as  for  individuals :  it  provides  for  future  wants.  Its 
utility  is  almost  incalculable,  and  of  such  a  nature  that  no 
progressive  nation  can  do  without  it.  Hence,  as  saving  is 
useful  to  a  nation,  it  is  the  duty  of  those  who  can  save,  to  do 
so.  It  devolves  upon  the  rich  and  those  that  live  on  inde- 
pendent incomes  to  save,  because  they  can  do  it  most  readily, 
without  foregoing  the  satisfaction  of  any  legitimate  want. 

This,  however,  is  not  the  popular  opinion  ;  the  general 
public  does  not  regard  with  favor  the  rich  who  save.  Even 
Montesquieu  wrote  that  "  when  the  rich  spend  little,  the  poor 
die  of  hunger."  But  we  have  already  pointed  out  the  cur- 
rent misconceptions  with  regard  to  the  effects  of  spending. 
(See  page  671.)  The  rich  man  who  saves  that  part  of  his 
income  which  exceeds  his  legitimate  wants,  and  who  applies 
it  productively  by  investing  it,  confers  a  benefit  on  all;  for, 
as  we  shall  see  in  discussing  investment,  he  simply  transfers 
his  right  to  consume  to  the  laborers  whom  he  employs  with 
his  capital.  (See  page  698.) 

The  rich  man  whose  avarice  prompts  him  to  neglect  the 
satisfaction  of  even  his  necessary  wants,  and  who  does  not 
invest  his  money  productively,  but  hoards  it  in  the  strictest 
sense  of  the  term,  really  harms  no  one  but  himself.  Such 
men,  moreover,  are  very  rare.  Each  piece  of  money  that  is 
put  aside  must  be  regarded  simply  as  an  "  order,"  giving  the 
possessor  the  right  to  claim  a  certain  part  of  existing 
wealth.  (See  page  220.)  The  man  who  saves  declares  that 
for  the  present  he  will  not  claim  his  share  of  the  social  stock 
of  wealth.  That  is  a  right  which  he  may  exercise  at  his  own 
pleasure ;  no  one  else  suffers  through  his  neglect  to  use  it. 
The  share  that  he  might'  have  consumed,  and  which  he 
abandons,  will  simply  be  consumed  by  others. 

It  may  be  asked  whether  the  poor  also  should  not  be  ad- 
vised to  save.  Is  not  saving  more  important  for  them  than 
for  the  rich  ?  Moralists  and  economists  do  indeed  give  this 
advice  to  the  poor.  But  the  advice  is  not  always  good.  We 
shall  not  make  the  customary  plea  that  saving  is  often  impos- 


696  PRINCIPLES   OF   POLITICAL   ECONOMY 

sible.  We  hold  that  saving  is  always  possible,  even  for  the 
poorest  people,  because  the  elasticity  of  human  wants  is  mar- 
vellous ;  wants  not  only  may  be  increased  in  number  up  to 
infinity,  but  it  is  equally  true  that  they  may  be  reduced 
almost  indefinitely.  A  man  having  only  a  pound  of  bread 
a  day  may  accustom  himself  to  eating  only  on  alternate  days, 
thus  saving  half.  Do  not  even  the  poorest  classes  spend 
hundreds  of  thousands  for  drink  and  tobacco  ?  It  is  certain 
that  they  could  save  this  amount,  and  that  they  would  be 
better  off  for  doing  so. 

Notwithstanding  this,  the  advice  to  the  poor  to  save  is  not 
always  justified.  Whenever  saving  involves  a  curtailment 
of  the  necessary  or  even  the  merely  legitimate  wants  of  man, 
the  effect  is  rather  bad  than  good.  It  is  absurd  to  sacrifice 
the  present  to  the  future,  especially  when  the  present  sacrifice 
is  likely  to  endanger  the  future.  Every  present  expenditure, 
private  or  public,  which  results  in  the  physical  or  mental 
development  of  man,  should  be  sanctioned  without  hesita- 
tion, not  only  as  good  in  itself,  but  as  preferable  even  to  sav- 
ing. What  better  use  can  a  man  make  of  wealth  than  to 
improve  his  health  or  to  develop  his  mind?  The  use  of  alco- 
hol and  tobacco,  to  be  sure,  should  be  discouraged.  But  the 
sums  used  for  these  purposes  would  be  better  employed  at 
the  butcher's,  the  baker's,  and  the  clothier's,  than  at  the  sav- 
ings bank;  for  it  must  be  borne  in  mind  that  the  money 
spent  for  drink  is  not  usually  taken  from  the  superfluous,  but 
from  the  necessary  expenditure.  Good  food,  salubrious  cloth- 
ing, healthful  homes,  comfortable  furniture,  medical  care, 
instructive  books,  promenades  and  voyages,  exercises  and 
amusements,  are  not  only  permissible  pleasures;  they  are 
wants  which  should  be  developed.  Their  satisfaction  consti- 
tutes the  best  investment,  because  they  increase  the  worth  of 
man  and  heighten  his  productiveness.1 

1  Benjamin  Franklin  said,  "  Empty  your  purse  into  your  head  ;  then  you 
can  never  lose  your  money,  and  you  will  always  be  sure  of  a  high  rate  of 
interest." 


INVESTMENT  697 

Much  the  same  advice  may  be  given  to  the  rich.  Although 
their  duty  is  to  save,  we  do  not  maintain  that  saving  is  their 
sole  or  even  their  principal  function.  If  they  saved  their 
entire  incomes,  and  if  a  spirit  of  penitence  prompted  them  to 
live  on  bread  and  water,  they  would  be  neglecting  one  of 
their  important  social  functions,  which  consists  in  giving  rise 
to  new  wants,  setting  the  example  of  legitimate  luxury,  and 
stimulating  economic  progress  by  exemplifying  the  possibili- 
ties of  human  development.  It  should  be  remembered,  more- 
over, that  aside  from  personal  expenditures  there  are  other 
socially  important  and  useful  ways  of  spending  money.  Phil- 
anthropic, scientific,  artistic,  and  religious  undertakings  can 
be  carried  on  only  by  the  wealthy,  and  are  sometimes  more 
important  than  saving. 

We  may  therefore  say,  by  way  of  conclusion,  that  saving 
is  a  luxury  (however  strange  the  association  of  these  two 
terms  may  appear)  scarcely  accessible  to  any  but  rich  socie- 
ties, and  confined  to  those  few  persons  that  possess  a  supera- 
bundance of  wealth.  Statistics  show  that  the  countries 
which  accumulate  savings  are  not  numerous,  and  that  even 
in  these  countries  the  amount  saved  rarely  exceeds  one-tenth 
of  the  national  income.  This  fraction,  although  small,  seems 
to  be  sufficient ;  there  is  no  lack  of  capital  available  for  all 
kinds  of  useful  or  even  foolish  enterprises. 

IV.    Investment 

In  conformity  with  an  old  tradition  we  shall  study  invest- 
ment in  the  same  chapter  as  saving,  although  in  reality 
investment  is  an  entirely  different  operation.  It  is  of  course 
true  that  investment  presupposes  saving,  since  we  cannot 
invest  unless  we  have  "put  something  aside";  this  is  the 
reason  for  the  close  association  of  the  two  operations  in  the 
mind  of  the  public  and  even  of  some  economists.  Saving 
and  investing  are,  however,  quite  distinct.  To  save  is  always 
a  way  of  consuming  ;  it  is  postponed  consumption,  and  means 


698  PRINCIPLES    OF    POLITICAL    ECONOMY 

that  something  has  been  kept  for  future  use.  To  invest,  on 
the  other  hand,  is  to  transfer  to  another  person  one's  powei 
to  consume.  This  is  usually  accomplished  by  means  of 
money;  those  to  whom  the  power  is  transferred  use  this 
money  productively,  generally  by  employing  laborers.  To 
invest  is  to  earn  something  with  our  capital,  to  use  our  capi- 
tal productively.  Investment,  therefore,  is  not  an  act  of 
consumption,  but  of  production. 

There  was  a  time  when  investment  was  difficult,  almost 
impossible,  for  two  reasons  :  — 

(1)  Because  there  was  no  opportunity  to  invest.    At  a  time 
when  lending  money  at  interest  was  prohibited,  or  could  be 
effected  only  under  some  disguised  form,  when  the  principal 
borrowers  of  modern  business  life  —  corporations  and  stock 
companies  —  were    unknown,    and    when     the     renting    of 
real  estate  was  an  exceptional  transaction,  there  could  be  but 
little  investment  of  money.     All  that  men  could  do  with 
their  savings  was  to  hoard  them  or  purchase  land. 

(2)  Because  there  was  no  security.     Men  will  not  willingly 
invest  their  money  except  in  countries  possessing  good  gov- 
ernment, good  laws,  and  the  habit  of  commercial  honesty; 
for  these  are  the  features  which  reduce  the  risk  of  robbery, 
invasion,  governmental  confiscation,  and  the  dishonesty  of 
powerful  debtors.     The  development  of  investment  depends 
on  security,  and  men  will  not  give  up  their  savings  to  others 
for  productive  consumption,  in  exchange  for  a  promise  to  re- 
pay, unless  there  is  comparatively  little  risk  of  losing  them. 

At  the  present  time,  political  security,  that  is  to  say,  immu- 
nity from  governmental  interference  and  the  certainty  of 
the  legal  enforcement  of  contracts,  is  fairly  well  guaranteed. 
What  may  be  called  moral  security,  or  faithfulness  in  keep- 
ing promises,  is  less  developed. 

The  present  epoch,  moreover,  offers  to  the  prospective  in- 
vestor thousands  of  inducements  unknown  to  our  ances- 
tors. Stock  exchanges  now  deal  in  innumerable  varieties  of 
"  investments."  Countless  industrial  and  financial  enter- 


UTILITY    OF    INVESTMENT  699 

prises,  stock  companies,  railroads,  government  and  municipal 
loans,  furnish  unnumbered  opportunities  for  the  investment 
of  money.  They  promise  more  or  less  interest,  and  often  pay 
what  amounts  to  a  premium  on  the  sum  invested,  the  returns 
sometimes  being  greater  than  the  original  investment.  In 
continental  European  countries  additional  inducement  to 
invest  money  is  offered  by  the  promise  of  lottery  prizes 
sometimes  amounting  to  1100,000  —  inducements  of  an  ex- 
ceedingly questionable  ethical  nature. 

The  social  usefulness  of  investment  is  incontestable. 
Without  investment  the  most  remarkable  enterprises  of 
modern  times  would  be  impossible  for  want  of  the  required 
capital.  From  the  standpoint  of  society  as  a  whole,  invest- 
ment must  be  regarded  as  an  employment  of  wealth  that  is 
more  altruistic  than  even  saving  or  spending.  Saving  and 
spending  are  necessarily  more  or  less  egoistic ;  but  the  in- 
vestor, instead  of  keeping  his  wealth  for  his  own  immediate 
or  future  consumption,  transfers  it  to  others  in  order  that 
they  may  consume  it  productively.1  Let  us  suppose  that  he 
uses  his  savings  to  buy  some  of  the  stock  issued  by  a  mining 
or  a  railroad  company.2  He  pays  the  company  the  money 
value  of  the  stock.  Does  the  company  merely  save  the 
money?  Surely  not,  for  if  this  were  its  purpose,  there 
would  be  no  real  need  to  borrow.  It  uses  the  money  to 
dig  shafts  or  tunnels,  to  construct  machinery,  to  buy  steel 
rails,  coal  and  ties,  to  pay  present  employees  and  to  hire 
others.  The  same  is  true  of  all  investments. 

Yet  the  man  who  invests  is  sometimes  quite  as  much  the 
object  of  popular  animadversion  as  the  man  who  hoards. 
People  mistakenly  assume  that  the  man  who  keeps  securities 

1  Doubtless  the  capitalist  does  not  perform  this  service  for  philanthropic 
reasons.     He  seeks  profit.     But  his  altruism,  although  unconscious,  has  the 
same  results  as  if  it  were  intentional.    As  John  Stuart  Mill  correctly  remarks, 
"  We  help  the  workers,  not  by  what  we  consume,  but  only  by  what  we  our- 
selves do  not  consume."" 

2  We  speak  advisedly  of  stock  issued  by  the  company.     For  if  the  stock 
were  purchased  at  the  bourse,  it  would  simply  be  transferred,  and  the 


700  PRINCIPLES   OF   POLITICAL   ECONOMY 

in  his  safe  is  engaged  in  hoarding,  and  that  he  withdraws 
money  from  circulation.  As  a  matter  of  fact,  his  money  is 
not  in  his  possession,  but  out  in  the  business  world,  stimu- 
lating business  and  employing  laborers  in  all  parts  of  the 
world.  Perhaps  his  money  is  used  to  hire  Chinese  laborers 
on  the  trans-Siberian  railway ;  perhaps  it  is  used  to  employ 
Kaffirs  in  the  mines  of  the  Transvaal.  In  such  cases,  i.e. 
whenever  capital  gives  employment  to  foreign  labor  and  not 
to  native  workers,  there  is  some  foundation  in  the  prejudice 
against  investors ;  for  then  investment  is  a  kind  of  absentee- 
ism in  capital.  But  if  foreign  investments  are  intelligently 
made,  they  will  bring  back  to  the  nation,  in  the  form  of 
profits  and  dividends,  more  wealth  than  has  been  sent  abroad. 

capitalist  whose  case  we  are  investigating  would  merely  be  substituting  him- 
self for  the  previous  owner  of  the  stock.  Even  in  this  case,  however,  the 
investment  of  capital  usually  means  its  productive  employment,  for  the  capi- 
talist who  has  sold  the  stock  is  obliged  to  make  some  use  of  the  proceeds ;  and 
it  is  probable  that  he  has  sold  his  stock  simply  because  he  has  found  some 
more  profitable  use  for  his  capital. 


INDEX 


absenteeism,  298,  684 ff. 

abstinence,  130,  556,  559. 

abundance,  145. 

accidents,  136,  539. 

adulteration,  153,  204,  680. 

advertising,  166  n,  203,  204,  680. 

agriculture,  75,  80  n,  93,  97  w,  167,  172, 

606. 

allotments,  602. 

American  Federation  of  Labor,  533  ff . 
anarchism,  29ft,  31,  460,  461. 
Anderson,  589  n. 
Anti-Corn-Law  League,  313. 
apprenticeship,  179. 
arbitrage,  387  TO. 
arbitration,  537  ff. 
Aristophanes,  237. 
Aristotle,  8, 187,  434,  556,  565. 
army,  85  n. 
art,  676. 

association,  39,  156  ff. 
Austrian  school,  20, 190  n,  655. 
autonomous  producers,  166,  633. 

Bagehot,  131. 

Bakunin,  29  n. 

balance  of  accounts,  294. 

balance  of  trade,  291. 

bank  notes,  375,  389,  390,  400,  417. 

Bank  of  France,  269  n,  415. 

banks,  367,  396,  399,  402  ff.,  571. 

banks,  savings,  692. 

Banks,  Scotch,  417. 

Banks  of  U.  S.,  404. 

barter,  210. 

Bastiat,  23  n,  25  n,  31,  38,  59,  60,  61  n, 

113,  152,  220  n,  314. 
Baudrillart,  23  n. 
Bellamy,  29  n. 
Bentham,  566. 
bills  of  credit,  274. 
bills  of  exchange,  281,  361. 
bimetallism,  234,  242,  246,  251, 252,  254. 
biologico-sociological  school,  21. 


birth-rate,  452,  668. 

Bismarck,  314. 

Bland-Allison  Act,  244. 

Bliss,  W.  D.  P.,85n. 

Boehm-Bawerk,  20  n,  57  w,  122  n,  126  n, 

558,  560. 

bonanza  farms,  106  n. 
Bonar,  James,  11  n. 
bond-deposit  system,  407. 
bond-security  system,  419. 
book  credits,  285. 
Bourgeois,  40  n. 
brassage,  233  n. 
Buchez,  649. 
building  associations,  397,  682. 

Cairnes,  24  n. 

call  loans,  372. 

Calvin,  566. 

Cameron,  210. 

canals,  210  n. 

Cantillon,  9. 

Capital,  69, 113, 116  ff.,  118,  120, 122,  123, 
126  n,  127,  129,  145,  159,  471,  475,  481, 
490,  553  ff.,  558,  564, 570,  623, 629, 650. 

capitalism,  119, 135. 

Carey,  H.  C.,  61  n,  318,  588  n. 

Carlyle,  39,  40  n. 

Catholic  social  reform,  35,  36,  551,  563. 

Cauwes,  24  n. 

charity,  447. 

checks,  287. 

Chevreuil,  18  w. 

child  labor,  522  ff. 

Christian  social  reform,  35,  37. 

cities,  681. 

Clark,  J.  B.,  499,  513,  638  n,  646. 

classical  economics,  69,  422,  553. 

clearing  house,  287. 

clipping,  235  n. 

coal  mines,  431. 

Cobden,  213,  496. 

coefficients  of  production,  144. 

coinage,  free,  233  n,  236. 


701 


702 


INDEX 


coinage,  gratuitous,  233  n. 

coins,  217  ff.,  220,  232. 

Colbert,  134,  312,  313. 

Colins,  29  n. 

Collectivism,  29  n,  30,  143  n,  150  n,  155, 

170,  467  if.,  472,  477,  502,  550,  632  ff., 

646,  654  n. 

colonial  markets,  185. 
commerce,  77,  80  n,  183,  202,  292  n,  336. 
communism,  30,  199  n,  459  ff.,  462. 
communistic  manifesto,  467  n. 
competition,  29,  141,  151  ff.,  194  n,  204, 

425ff.,631ff. 
Comte,  2  n,  25  n,  39. 
concentration,  166  n. 
conciliation,  537  ff. 
Condillac,  52,  198. 
conquest,  603. 
constraint,  82. 
consumption,  120,  444,  479,  652,  655  ff., 

677,  693. 
contract,  156. 
cooperation,  37,  39,  155,  169,  205,  396, 

478,  479,  481,  552,  648  ff.,  652,  677,  693. 
corporations,  638,  640. 
corporative  economy,  133. 
cost,  52,  189,  193. 
cost  of  production,   153,  193,  589,  626, 

627  n,  628. 

Courcelle-Seneuil,  23  n,  130  n,  560. 
Cournot,  20. 
credit,  267,  356 ff.,  363,  366,  393,  564,  690, 

693. 

crime,  441,  448  ff. 

crises,  136,  141  ff.,  144 n,  388 n,  680. 
Cromwell,  312. 
currency  principle,  417. 
customs  duties,  312  n. 

demand  and  supply,  139, 151, 188, 195, 496. 
Demolins,  86  n. 
department  stores,  164  n. 
dependents,  450,  452. 
deposits,  368. 

depreciation  of  money,  223. 
desirability,  57,  196. 
determinism,  27  n. 
diminishing  returns,  92,  585. 
discount,  357,  370,  388. 
distribution,  421,  437,  438,  454,  479. 
dividends,  532  n,  577,  680. 
division  of  labor,  173  ff.,  176,  447. 
domestic  economy,  133. 
drafts,  282. 
Dumoulin,  566. 


Dunoyer,  23  n. 
Dupuit,  57  n. 
duration  of  life,  85  n. 
duties,  312  n,  315  n,  353. 
dynamic  society,  329. 

economic  man,  17. 

economics,  object  of,  2. 

economics,  rise  of,  7  ff. 

economics,  scope  of,  2,  3. 

Edge  worth,  20  n. 

egoism,  82. 

Elberfeld  system,  453 n. 

Ely,  R.  T.,  35  n,  40. 

employer  and  employee,  135. 

employers,  157,  542. 

Engel,  Dr.,663. 

Engels,  Fr.,  29  n,  30,  467  n. 

engrossing,  151. 

entrepreneur,  75,  484,  568,  623,  638. 

environment,  86  ff. 

equal  sharing,  455  ff. 

Espinas,  27  n,  181. 

ethics,  2. 

evolution,  26. 

exchange,  183, 184, 186, 187, 196, 197,  201 

expenditure,  family,  662. 

experiment,  15  ff. 

exploitation  theory,  560,  633. 

exporting  point,  384  n. 

exports,  294,  306. 

Fabian  Society,  29  n,  467  n. 
factors  of  production,  69. 
factory  laws,  492. 
factory  system,  134. 
fair  wages,  551. 
fairs,  205  n. 
fair  trade,  352. 

family,  156,  201,  448,  603,  677. 
family  economy,  132. 
farmers'  associations,  168. 
Fawcett,  342. 

fellow-servant  doctrine,  543. 
female  labor,  524  ff. 
fermage,  608. 
Ferrara,  23  n. 
fertility,  597. 
Fetter,  11  n. 
fiat  money,  261  n. 
final  utility,  54  ff.,  189,  573  ff.,  655. 
Fisher,  Irving,  20  n. 
food,  40  n,  663,  666  ff. 
Fourier,  29  n,  30,  39,  80,  154  n,  179,  454, 
460  n,  462,  479,  678. 


INDEX 


703 


Franklin,  Benj.,  57  n,  439. 
free  bank  system,  407. 
free  contract,  422. 
free  trade,  331,  340,  342. 
French  Revolution,  141. 

Gautier,  41  n. 

George,  Henry,  616. 

German  labor  laws,  541  ff. 

Gide,  24  n,  40  n,  230  n. 

gift,  436. 

glaciers,  100,  102. 

gold,  241,  253,  256  n,  257. 

Gossen,  20  n,  57  n. 

Gothenburg  system,  676  n. 

Gournay,  23  n. 

government  banks,  403. 

government  intervention,  24,  31,  33,  36, 

37. 

greenbacks,  261  n,  277. 
Gresham's  law,  235,  237  ff . 
guilds,  133, 185,  489. 
Gun  ton,  G.,  on  wages,  504. 

Hamilton,  242,  315. 

Hargreaves,  108. 

Herckenrath,  230  n. 

Herron,  G.  D.,  35  n,  37. 

Hildebrand,  14  n. 

Hill,  Octavia,  684. 

historical  school,  14,  17. 

hoarding,  688. 

Hobson,  J.  H.,  638. 

holidays,  84. 

Holmes,  G.  K.,  437. 

home  economy,  132. 

homestead  law,  national,  612. 

homestead  laws,  states',  395. 

hours  of  labor,  84,  179,  182,  447,  521  ff. 

houses,  106. 

household  community,  677. 

housing,  41  n,  681. 

hucksters,  202. 

Icaria,  460  n,  463. 
idleness,  448. 
Ihering,  230  n. 
imitation,  42 n. 
immigrants,  457. 
imports,  294,  303. 
improvidence,  450,  688. 
incomes,  437,  455  ff .,  458,  484. 
index  numbers,  226. 
indifference,  law  of,  188  n. 
indolence,  443. 


inductive  method,  15. 

industry,  183. 

inflationists,  272  n. 

inheritance,  433, 436, 443,  445,  452, 464  ff., 

620. 

instruments  of  production,  70  n. 
insurance,  social,  453,  539. 
intemperance,  675,  676  n. 
interest,  295,  357,  484,  553  ff.,  563,  577. 
invention,  48  n,  74,  624. 
investment,  697. 

Jacquart,  108. 

Jannet,  Claudio,  482. 

Jevons,   19,  20  n,  57  n,   82,  88  n,   142  n, 

188  n,  195,  217  n,  219,  286,  421,  506  n, 

551  n. 

Juglar,  388  n. 
jurisprudence,  2. 

Kartellen,  155. 
Ketteler,  35  n. 
King,  Gregory,  188. 
Knights  of  Labor,  532  ff. 
Kropotkin,  29  n. 

labor,  59,  69,  71ff.,73,  89,  112,  141,  189, 

193,  488,  490 ff.,  496,  521  ff.,  547,  593, 

634 ff.,  645. 

labor  co-partnership,  648. 
labor  organizations,  491,  528 ff. 
labor  insurance,  492,  539  ff . 
labor  laws,  33,  492. 
labor  theory  of  interest,  560. 
Laffitte,  231. 

laisserfaire,  10,  23  ff.,  32. 
land,  69,  86  n,  89  ff.,  119  n,  455,  590  ff., 

606,  629. 

land  as  property,  431,  590  ff. 
land-rent,  582  ff. 

large-scale  production,  161  ff.,  472. 
Lassalle,  29  n,  30,  467,  501,  504,  654  n. 
Latin  Union,  248. 
Launhardt,  20  n. 

Laveleye,  E.  de,  33  n,  142,  147  n,  201  n. 
laws  in  economics,  3,  4,  6. 
Leclaire,  644,  648. 
legal  tender,  232,  241,  379  n. 
Leroux,  39. 
Leroy-Beaulieu,  Paul,  24  w,  35  n,  105  n, 

239,  365  n,  441  n,  477,  578,  642,  646. 
liberal  school,  10,  23,  36,  550. 
Liebknecht,  502. 
List,  Friedrich,  317. 
loans,  357,  436,563,577  ff. 


704 


INDEX 


local  option,  676  n. 
loi  des  dtbouchts,  148. 
Lowe,  227  n. 
Luddites,  108. 
luxury,  663,  673  if. ,697. 

MacCulloch,  24  n. 

machinery,  96,  103,  107,  108,  110,  111, 

179,  186. 
Madison,  315. 

Malthus,  11,  450, 498,  666  ff. 
manufacture,  134. 
Marco  Polo,  201. 
markets,  148,  176,  185  ff. 
Marshall,  20  n,  64  n,  109,  497. 
Marx,  Karl,  29  n,  30,  43 n,  59,  60  n,  61, 

68, 129  n,  454,  467  n,  469  n,  470,  471  n, 

477,554,  560,  633  ff. 
Menger,  Karl,  20  n,  57  n,  227  n,  559. 
mercantilism,  9,  311. 
merchants,  185  n,  201,  680. 
metayer  system,  613  n. 
Mill,  James,  560. 
Mill,  John    Stuart,  24  n,  42,  115,  154, 

335  n,  440,  498,  500,  654  n. 
Molinari,  de,24n,641. 
money,  8,  44  n,  65,  130, 146  ff.,  201,  211, 

213  ff.,  218,  221  n,  228,  236,  240,  242, 

261,  290, 400,  445,  556,  570,  690. 
monometallism,  242,  250. 
monopoly,  153  ff.,  194  n,  625  ff. 
moral  restraint,  667. 
mortgages,  393. 
motive  forces,  96. 
mutual  societies,  693. 

national  bank  notes,  420. 
national  banks,  404. 
nationalism,  30. 
nationalization  of  land,  614  ff. 
natural  law,  3,  5,  24,  30. 
nature,  86 ff.,  119. 
normal  value,  139. 

occupancy,  429. 

ophelimity,  48. 

optimism,  25. 

organic  theory,  21. 

overproduction,  107,  136  ff.,  156,  450 n. 

Owen,  Robert,  29  n,  459  n,  633. 

Paepe,  de,  29  n,  467  n. 
pain  and  labor,  80. 

paper    money,    227,    240,    258  ff.,   261, 
272  ff.,  276. 


Pareto,  48,  144,  195. 

Patten,  S.  N.,  20n,  57 n,  329. 

pauperism,  437,  444. 

Peabody  Fund,  683. 

pedlers,  202. 

people's  banks,  396. 

physiocrats,  9, 10,  75. 

piece  wages,  549. 

pleasure  and  pain,  52. 

pools,  151. 

population,  90,  451,  598,  666  ff. 

postage  currency,  279. 

premium  for  gold,  271. 

premiums  to  producers,  350. 

prescription,  430. 

price,  64,  187,  190  ff.,  195,  224,  225  ff., 

252  ff.,  273,. 392,  587. 
price  statistics,  515  ff. 
production,  71,  120,    132,  137,  442,  491, 

558,  664. 

productivity  theory,  505,  558,  574. 
professions,  77. 
profits,  69, 70  n,  154,  484,  555,  568, 623  ff., 

680. 

profit-sharing,  642  ff.,  652. 
progress,  113. 
prohibition,  676  n. 
promissory  notes,  361. 
property,  8,  29,  428,  430,  432,  460,  469, 

480,  553,  597,  600  ff. 
protection,  310,  318,  350,  626. 
Protestant  social  reform,  37. 
Proudhon,  29  n,  50  n. 
purchase,  210,  678. 
pure  economics,  2,  3. 
pure  food  laws,  205  n. 

quasi-rents,  192  n. 
Quesnay,  9,  484  n. 

Raiffeisen  loan  societies,  395. 

railroads,  186,  209. 

rate  of  exchange,  380. 

ratio  of  gold  and  silver,  234,  242, 

realistic  school,  14. 

reciprocity,  352. 

rent,  69,  414,  436,  582  ff.,  627  ff. 

reserve,  372,  389. 

Ricardo,  11,  59,  62  n,  502,  583. 

right  to  existence,  449. 

right  to  relief,  447,  450. 

right  to  work,  450. 

roads,  208. 

Rochdale  system,  679  ff, 

Rodbertus,  560,  636. 


INDEX 


705 


safety-fund  system,  407. 

Saint-Simon,  29  n.,  30,464. 

sale,  210. 

Saumaise,  566. 

saving,  129  ff.,  452,  475,  665,  688  ff. 

Say,  J.  B.,  11,  21,  23  n,  50  n,  52,  148, 

484  n,  502,  558,  624. 
Schulze-Delitzsch  banks,  396. 
seigniorage,  233  n. 
Senior,  24  n,  54,  130  n,  556,  559. 
services,  69,  77,  80  n. 
shares  of  stock,  432,  577. 
Sherman  Act,  245,  251. 
shipping-point,  384  w. 
shop-keepers,  203. 
silver,  228  n,  241,  256  n. 
single  tax  system,  616. 
slavery,  132, 157,  431,  488. 
Smith,  Adam,  10,  59,  68,  76,  127  n,  174, 

186,  266,  484  n. 
social  democracy,  31  n,  32. 
social  economics,  2,  3,  8. 
socialism,  28 ff.,  437,  440, 447,  454 ff.,  632, 

646,  650/1. 

solidarity,  31,  181,  448,  452,  480. 
Spahr,  Dr.  C.  B.,  438. 
speculation,  624. 

Spencer,  Herbert,  22,  431  n,  600 n. 
spending,  665,  670  ff . 
state  socialism,  31  n,  32,  155. 
static  societies,  329. 
stock,  432,  577. 
stock  companies,  638,  640. 
strikes,  520,  535  ff. 
subdivision  of  land,  620  ff. 
Suffolk  Bank,  406. 
Sully,  134. 

superintendence,  75,  624. 
sweating  system,  137. 
syndicates,  farmers',  205. 

Tacitus,  174. 

Tarde,  G.,  22 n,  40  rc,  42  n,  48 n. 
tariff,  312,  315  ff.,  352. 
Taussig,  279. 


taxes,  631  n. 

tenant  system,  610. 

Thiers,  314. 

Thompson,  R.  E.,  325. 

Thornton,  500. 

Thuenen,  von,  57  n,  548  n,  576. 

time,  83,  93,  561. 

token  money,  236. 

Tolstoi,  39,  42. 

Torrens  system,  605. 

trade,  8,  77,  SOn,  133,  201  ff.,  291  ff., 

301  ff.,  680. 

trades  unions,  490,  491,  528  ff.,  652. 
transportation,  76,  80  n,  201,  206,  294. 
Treasury  notes,  245,  278. 
treaties  of  commerce,  353  ff. 
tribal  property,  601. 
truck  system,  492  n. 
trusts,  151,  155,  161  ff.,  194  n. 
Turgot,  502,  566,  578. 

unearned  increment,  590  ff. 

use  theory  of  interest,  558. 

usury,  36,  557  ff. 

utility,  46  ff.,  52  ff.,  187  n,  189,  655  ff. 

value,  49, 140,  186  ff.,  196,  477, 655. 

wage  contract,  548,  561. 

wage-earners,  166,  436,  489. 

wages,  69,   136,  158,  231  n,  484,  487  ff., 

492 ff.,  501  ff.,  505 ff.,  514 ff.,  546 ff., 

642,  651. 

Walker,  Francis,  493  ff.,  506. 
Walras,  Le'on,  20  n,  21  n,  57  n,  144,  632  n. 
wants,  40  ff,  221,  655,  668,  673,  688. 
wealth,  42,  46  ff.,  120,  122,  437,  456,  457. 
Wells,  D.  A.,  332. 
White,  Horace,  275. 
Wood,  Stuart,  513. 
working  classes,  489. 
workshop  economy,  134. 

Xenophon,  7. 


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